By David Ljunggren

OTTAWA (Reuters) -Canada will sign onto a complaint against the United States over its interpretation of how free trade should apply to the continental auto industry, another sign of souring ties between the North American neighbors.

Trade Minister Mary Ng said on Thursday that Canada would join Mexico in requesting a dispute settlement panel under the terms of the U.S.-Mexico-Canada (USMCA) trade pact.

The two countries want to settle disagreements over how to apply automotive sector content requirements under the treaty, which came into effect in 2020, replacing the North American Free Trade Agreement (NAFTA).

Mexico and Canada are also unhappy about proposed U.S. tax breaks for American-based manufacturers of electric vehicles. This, they say, could undermine the highly integrated North American auto industry.

Under USMCA, 75% of a vehicle’s components must originate in North America to quality for tax-free status, up from 62.5% under NAFTA.

Mexico and Canada favor a more flexible interpretation of the regulations than Washington, which sought an overhaul of NAFTA when Donald Trump was president in order to protect manufacturing jobs.

“The interpretation that the United States adopted … is inconsistent with USMCA and the understanding shared by the parties and stakeholders throughout the negotiations,” Ng said in a statement. Mexico welcomed the move.


The office of the U.S. Trade Representative expressed confidence its interpretation was consistent with the USMCA.

Spokesman Adam Hodge said by email that the rules of origin were needed to attract new investment and create good jobs.

But Flavio Volpe, president of the Canadian Automotive Parts Manufacturers’ Association, said the U.S. approach might persuade manufacturers to use cheaper parts from outside North America and accept the 2.5% tariff that the United States would then impose on their vehicles.

The biggest losers would be U.S. companies which supply around 55% of all auto parts used in North American production, he told the Canadian Broadcasting Corp.

Canada’s decision came as deputy trade ministers from the three USMCA partners held an initial meeting on Thursday. A joint statement made no mention of the automotive dispute, focusing instead on efforts to cooperate on labor, environmental, small business, regional competitiveness and state enterprises issues.

Joe Biden’s election did little to improve trade tensions with Ottawa that had simmered under Trump. A USMCA panel last week said Canada’s dairy practices violated the accord and last month Ottawa launched a challenge against U.S. duties on softwood lumber.

Washington is also unhappy about a proposed Canadian tax on digital services and reiterated its complaints on Wednesday.

(Reporting by David Ljunggren; additional reporting by Dave Graham in Mexico City, David Shepardson and David Lawder in Washington; editing by Jonathan Oatis, Alexandra Hudson and Cynthia Osterman)