Washington’s 25% Auto Tariff Fight With Mexico Raises Fresh Questions for Canada’s CUSMA Future

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A trade agreement meant to protect North America’s automotive industry is facing another difficult test as Washington and Mexico struggle to resolve tariffs on vehicles, steel and aluminum.

Reports emerging October 15–17, 2026, suggest U.S. Commerce Secretary Howard Lutnick is resisting significant reductions to President Donald Trump’s 25% tariff on Mexican-built vehicles, complicating negotiations that had appeared close to producing a deal. Mexico disputes claims that discussions have stalled and is pressing for a lower rate.

For Canada, the disagreement carries consequences beyond its southern neighbour. Canadian, American and Mexican factories remain connected through deeply integrated supply chains, while Washington’s refusal to extend the Canada-United States-Mexico Agreement (CUSMA) in July has already created uncertainty about the future of continental trade.

The latest dispute raises questions about whether North America’s three largest trading partners can restore predictable conditions for automotive manufacturing.

Washington and Mexico Hit a New Obstacle Over the 25% Auto Tariff

Negotiations between the United States and Mexico encountered renewed resistance in mid-October, according to reporting from The Wall Street Journal and Reuters. The two governments had reportedly been moving toward an agreement that would reduce American tariffs on Mexican automobiles, steel and aluminum in exchange for concessions from Mexico. However, people familiar with the discussions said U.S. Commerce Secretary Howard Lutnick opposed substantial reductions to the 25% tariff on Mexican-built vehicles and the 50% duties imposed on steel and aluminum. His objections reportedly extended to certain finished products manufactured using those metals.

The disagreement matters because the proposed arrangement was expected to create momentum for broader negotiations surrounding CUSMA. Yet descriptions of a complete breakdown would be premature. A U.S. Commerce Department spokesperson said officials remained in regular contact with Mexico, while Mexican representatives maintained that progress was continuing. The reported resistance illustrates a central challenge facing North American trade negotiations: even when governments agree on broader economic objectives, disputes over individual tariffs can prevent them from finalizing an agreement. Until Washington announces a policy change, the existing tariff framework remains in place.

Mexico Pushes to Reduce the Auto Tariff From 25% to 15%

Mexico is seeking a lower American automotive tariff rather than simply accepting Washington’s existing restrictions. On October 17, Spanish news agency EFE reported that Economy Secretary Marcelo Ebrard rejected suggestions that negotiations had stalled. Ebrard said discussions were taking place almost daily and that Lutnick had not personally informed him of opposition to the proposed reductions. Mexico’s objective is to lower the headline automotive tariff from 25% to 15%, bringing its treatment closer to the terms Washington has granted South Korea. Mexican negotiators also want to preserve reductions linked to American-made components used in Mexican vehicles.

The economic pressure behind that request is substantial. Official Mexican figures cited by EFE show that the country exported 277,369 light vehicles in September 2026, a decline of 11.9% compared with September 2025. Production fell 15.1% to 301,803 vehicles, although domestic sales increased. About 76% of Mexico’s vehicle exports during the first nine months of 2026 went to the United States. Those figures do not establish that tariffs caused the entire decline, but they demonstrate how exposed the Mexican auto industry remains to American demand and trade policy.

Trump’s 25% Auto Tariff Is More Complicated Than a Single Rate

The tariff at the centre of the negotiations dates to March 26, 2025, when Trump signed a proclamation imposing additional duties on imported passenger vehicles and light trucks under Section 232 of the Trade Expansion Act. The 25% vehicle tariff took effect April 3, 2025. However, automobiles qualifying under CUSMA receive special treatment. Manufacturers can submit documentation establishing how much of a vehicle’s value comes from American-produced or substantially transformed components. Once approved, the tariff is assessed against the vehicle’s non-U.S. content rather than automatically applying to its entire customs value.

Consider a hypothetical vehicle with a customs value of US$40,000, including US$12,000 in qualifying American content. Under the applicable approved calculation, the remaining US$28,000 would face the 25% additional tariff, producing a US$7,000 charge before other applicable duties or adjustments. The example illustrates why manufacturers are concerned about both tariff rates and the rules governing content calculations. A lower headline rate could provide substantial relief, but the actual benefit would depend on how Washington treats American components and individual vehicle classifications.

Washington’s Refusal to Extend CUSMA Makes the Dispute More Significant

The latest disagreement comes after a major setback for North American trade relations. On July 1, 2026, the United States formally declined to extend CUSMA during the agreement’s first mandatory six-year joint review. U.S. Trade Representative Jamieson Greer said Washington would not renew the arrangement in its existing form, citing concerns about trade deficits and provisions the administration believes require improvement. Canada and Mexico had supported extending the agreement. The American decision meant the three countries would continue negotiations rather than securing another 16-year term.

However, the decision did not terminate CUSMA or immediately eliminate its existing trade preferences. The agreement remains in force until 2036 unless its terms change or a government takes separate action to withdraw. Without an agreement on extension, the three countries must conduct annual reviews. A unanimous extension could move the agreement’s expiration to 2042. For Canadian manufacturers, the uncertainty is not simply whether existing rules remain valid today. The larger question is whether those rules will provide a stable foundation for investments that require years of planning.

Separate U.S. Negotiations With Mexico Could Shape Canada’s Bargaining Position

Although CUSMA is a trilateral agreement, Washington has increasingly pursued separate negotiations with Ottawa and Mexico City. American and Mexican officials began formal bilateral discussions earlier in 2026, covering issues such as automotive rules of origin, steel, aluminum and economic security. By July, Reuters reported that Mexican negotiations were considerably further advanced than Canada’s discussions with Washington. The difference creates a potential challenge for Ottawa because concessions negotiated between two governments could influence what the United States eventually demands from the third.

That possibility does not mean Canada would automatically be bound by a U.S.-Mexico tariff arrangement. Any change to CUSMA’s trilateral obligations would still require the appropriate agreement and legal procedures. Nevertheless, Canada’s negotiators have an interest in the terms Mexico secures. If Washington grants Mexican manufacturers preferential automotive treatment, Canadian producers could seek comparable conditions to avoid a disadvantage. Conversely, a hardline American position toward Mexico could suggest that major tariff reductions will remain difficult for Canada as well. The latest dispute therefore provides insight into Washington’s negotiating priorities without determining Canada’s eventual outcome.

Canada’s Auto Industry Has Enormous Exposure to American Trade Decisions

Canada’s automotive industry is particularly vulnerable to this uncertainty because its manufacturing network was built around access to American customers. Federal government figures show that Canada produced more than 1.2 million passenger vehicles in 2025. More than 90% of Canadian-made vehicles and approximately 60% of Canadian-made automotive parts are exported to the United States. The sector supports roughly 125,000 direct jobs, alongside employment in transportation, dealerships, equipment manufacturing and related services. For communities across southern Ontario, those figures represent factories and livelihoods rather than abstract trade statistics.

The industry’s dependence on American demand means decisions in Washington can quickly affect employment and investment in Canada. A vehicle assembled in Ontario may contain components produced across several North American locations, while Canadian suppliers can manufacture parts for vehicles ultimately assembled in Michigan, Ohio or Mexico. Tariffs add costs to a production system that traditionally relied on predictable cross-border trade. When manufacturers choose where to assign their next vehicle programs, uncertainty over future duties can influence those decisions even before another tariff increase occurs. This makes the outcome of Mexico’s negotiations relevant to Canadian workers and businesses.

CUSMA’s 75% North American Content Rule Could Become Another Flashpoint

Automotive rules of origin are among the most important provisions of CUSMA. To qualify for preferential treatment, passenger vehicles generally must meet a 75% regional value-content requirement, compared with 62.5% under the previous NAFTA framework. The agreement also contains requirements involving major components, steel and aluminum sourcing, and labour. Its labour-value provisions require 40% of a passenger car’s value, or 45% for a light truck, to be associated with qualifying higher-wage production and related activities. These rules were designed to encourage manufacturing investment and maintain employment across North America.

However, regional content and American content are not interchangeable. A component manufactured in Ontario can help a vehicle satisfy CUSMA’s North American origin requirements without qualifying as U.S. content for Washington’s separate Section 232 automotive tariff calculation. That difference has become especially important as American negotiators press for stronger domestic manufacturing incentives. Washington has also raised concerns about third-country components entering North American supply chains. Changes to these rules could influence whether automakers purchase components from Canadian, Mexican, American or overseas suppliers, making negotiations over origin requirements as important as the tariff percentages themselves.

Steel and Aluminum Disputes Create Additional Risks for Auto Supply Chains

The trade disagreement extends beyond finished vehicles. Lutnick’s reported objections also concern Washington’s 50% tariffs on steel and aluminum, two essential materials for automotive manufacturing. Steel is used in vehicle bodies, structural components and numerous mechanical systems, while aluminum plays an important role in lightweight construction and powertrain components. Disputes over these metals therefore affect a broader manufacturing network than the companies assembling vehicles. A decision about steel tariffs can influence suppliers making automotive components as well as construction materials and industrial equipment.

Canada’s steel industry demonstrates the economic pressure involved. Reuters reported on October 16 that Canadian steel shipments to the United States fell approximately 60% in 2025 after American tariff increases. Meanwhile, the share of steel consumed in Canada that was produced domestically rose from 41% in 2024 to 51% in 2025, according to figures calculated by the United Steelworkers. That adjustment suggests Canadian producers have found some relief by serving domestic customers, although it has not eliminated job losses or weakened export demand. For Canada’s auto sector, resolving tariffs on vehicles without addressing related materials could leave important parts of its supply chain under pressure.

Canadian Auto Workers Are Already Living With the Consequences

The uncertainty surrounding CUSMA is already visible in Canadian manufacturing communities. General Motors eliminated more than 700 direct jobs when it ended the third shift at its Oshawa Assembly Plant in January 2026, according to Unifor. The union has linked the reduction to changes in American trade policy and production decisions. GM subsequently reached a new Canadian labour agreement in August, securing commitments exceeding C$1 billion for future products and investments in Oshawa and St. Catharines. However, its CAMI facility in Ingersoll remains idled, illustrating how fresh investment commitments can coexist with serious employment uncertainty.

Stellantis workers are facing another difficult period. The automaker has scheduled a three-week production shutdown at its Windsor Assembly Plant beginning October 19, with tariffs and production volumes cited as contributing factors. Meanwhile, Unifor members are voting October 17–18 on whether to authorize strike action as disagreements continue over the future of the idled Brampton Assembly Plant. Results are expected October 19. These developments cannot all be attributed solely to Trump’s tariffs; corporate product strategies and consumer demand also matter. Nevertheless, they demonstrate why greater trade predictability is important to workers whose jobs depend on long-term manufacturing commitments.

Carney’s Government Faces a Difficult Choice Between Trade Relief and Long-Term Security

Prime Minister Mark Carney’s government has already begun reshaping Canada’s automotive strategy in response to American trade restrictions. In February 2026, Ottawa announced plans to dedicate up to C$3 billion from the Strategic Response Fund and another C$100 million from the Regional Tariff Response Initiative to support automotive investment and diversification. The government also proposed strengthening its automotive tariff-remission framework so companies would receive greater incentives to maintain and expand Canadian manufacturing. A proposed system of tradeable import credits could reward domestic production and investment, although the proposal should not be confused with an already implemented policy.

The next challenge is preserving Canada’s position within the North American automotive industry while negotiations remain unsettled. The Bank of Canada has identified several possible CUSMA outcomes, ranging from renewal with limited changes to significant renegotiation, prolonged annual reviews or withdrawal. Each could produce different consequences for trade costs, investment and employment. Mexico’s attempt to secure a 15% automotive tariff will be an important development to follow, but no completed agreement has been announced. For Canadian workers and manufacturers, the broader question remains whether governments can negotiate rules that preserve regional manufacturing while providing enough certainty for companies to invest in their next generation of vehicles.

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