These have been uncertain times for North America’s automotive industry. Significant shifts in tariff policies by the US and its trading partners have complicated decision making throughout tightly integrated manufacturing and component-sourcing footprints across the US, Mexico, and Canada.
Automotive leaders must prepare now for more changes. In July 2026, the three nations are scheduled to begin a joint review of the US-Mexico-Canada Agreement (USMCA), the pact that has enabled vehicles and components to cross their borders seamlessly and duty free if they meet certain parts and materials content and labor rules.
The outcome will determine the future of North American supply chains for decades to come. The review could result in fundamental revisions to the USMCA. It might even lead to replacing the agreement with bilateral frameworks among the three nations.
Although the roughly $400 billion trade in North American automotive vehicle and parts has created enormous economic value, several issues have led to demands for change. Those include the geographic distribution of assembly plants and the fact that parts and materials have increasingly been manufactured outside of North America.
The US appears to be least satisfied with the status quo. It is widely expected to seek trade terms that will bring more automotive jobs and economic benefits to its home soil. On the table are likely to be stricter US content requirements for which vehicles and components can qualify for duty-free access. The US is also expected to seek restrictions on which automotive products can be made in China or by Chinese-owned companies in Mexico, Canada, and other nations.
It’s too early to predict the final outcome of the USMCA renegotiation. But the stakes for manufacturers, governments, and communities are significant. A USMCA repeal could add $33 billion in additional tariff-related costs to the North America automotive industry. Even if the USMCA is retained in a revised form, automotive companies should brace for higher costs, greater administrative complexity, and even limits on market access. OEMs and suppliers must begin preparing now for the potential of major change in automotive rules.
Even if the USMCA is retained in a revised form, automotive companies should brace for higher costs, greater administrative complexity, and even limits on market access. OEMs and suppliers must begin preparing now.
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Leaders should act now to reduce cost exposure, stress-test strategic scenarios, and adapt supply chains, such as by making moves to add US capacity and sourcing. Leaders should also work to shape the policy debate that will define the next phase of regional integration. Companies that move early will be better positioned than those that wait for clarity.
Emerging Fault Lines in Regional Automotive Integration
The integration of the North American auto sector began in the 1960s. But it was the North American Free Trade Agreement (NAFTA), which went into effect in 1994, that created the industry we know today. This integration deepened under the USMCA, which was negotiated during President Donald Trump’s first term and entered force in 2020.
Intra-USMCA auto trade grew by $142 billion from 2020 through 2024—2.6 times the amount of trade growth as with non-USMCA partners. Such trade is very input heavy, with around 70% coming in the form of capital or intermediate goods. This is a strong indicator of how intertwined the three economies have become. Additionally, more than $200 billion in capital investments have been made in North American vehicle and parts manufacturing facilities, equipment, and other operations since the USMCA agreement came into force.
The dramatic growth in North American auto manufacturing has created imbalances, however. The US combined trade deficit with Mexico and Canada reached an all-time high of $82 billion in 2024 in autos and $33 billion in auto parts.
The China factor is likely to be central to the USMCA 2.0 auto negotiations. Among the US objectives are to reduce and eventually eliminate imports of Chinese vehicles into North America and to keep Chinese parts and components out of the region’s automotive supply chains. Some US policymakers and industry stakeholders note that North America’s combined vehicle imports from China have grown by 625% over the past five years, reaching $10 billion in 2025. The US, Canada, and Mexico all run significant automotive deficits with China.
The three North American governments are taking different approaches to addressing this trade imbalance. The US has imposed punitive tariffs on Chinese vehicles, including a 100% tariff on electric vehicles and tariffs on internal combustion engine vehicles north of 50%. In late 2025, Mexico imposed a 50% tariff on Chinese cars and increased tariffs on many Chinese auto parts. Canada, by contrast, initially aligned with the US in 2024 by imposing a 100% tariff on imported Chinese vehicle imports. But it reversed course in early 2026 by allowing single-digit tariffs on imports of 49,000 Chinese vehicles, including battery electric, hybrid, and plug-in hybrid models. That number is expected to grow to 70,000 by 2030.
The US has also grown concerned about the rise of auto parts production at Chinese-owned factories in Mexico. It has suspected that its neighbors are becoming “back doors” through which Chinese companies can send parts to the US duty free.
These dynamics are increasing the challenges trade partners must work through. They reflect diverging assessments of the agreement’s benefits and outcomes—as well as its future role in the automotive sector.
Section 232 Tariffs Changed the Game
Unilateral US tariff increases and bilateral trade deals imposed in 2025 weakened the USMCA’s benefits for finished vehicles but have provided some advantages for North American producers of auto parts. Under Section 232 of the Trade Expansion Act of 1962, which allows the president to apply duties for national security reasons, the US imposed a 25% tariff on imports of finished vehicles. Only the US content in vehicles—rather than their full value—is now exempt.
USMCA compliance benefits for North American-produced auto parts, by contrast, remain fully exempt from the 25% Section 232 tariff assessed on parts imported from the rest of the world. Automotive companies want to preserve this crucial advantage in USMCA 2.0.
Bilateral trade deals that the US has negotiated with other partners, however, have further added cost competitiveness challenges for North America’s auto industry. Finished vehicles from the EU, Japan, and South Korea, for example, now enter the US with a 15% tariff—even if they contain no US content. To get comparable tariff treatment, therefore, at least 40% of the content of North American-built vehicles must be sourced in the US—where manufacturing costs are substantially higher than in Mexico and other nations. What’s more, the US has deepened and expanded the Section 232 tariff on steel and aluminum derivative products; duties are now assessed on full customs value and not on metal content alone. This is further increasing the cost of materials for US-assembled cars.
Taken together, US trade actions in 2025 have added an estimated $30 billion to $40 billion to the cost of goods sold in North American vehicle manufacturing. OEMs have thus far absorbed most of these costs, rather than passing them on to consumers and suppliers. That tariff risk translates into profitability pressure of 20% to 60% of OEMs’ global earnings before interest and taxes, with the greatest impact on US-based automakers. (See Exhibit 1.)
Taken together, US trade actions in 2025 have added an estimated $30 billion to $40 billion to the cost of goods sold in North American vehicle manufacturing.
To help mitigate costs and avoid punitive duties, OEMs and their suppliers have invested heavily to improve their ability to efficiently comply with tariff rules. An estimated 90% of cars imported into the US from Canada and Mexico now comply with USMCA content requirements, as do 62% to 90% of components, depending on the category. (See Exhibit 2.) The US content in finished autos, however, averages just 42%—an issue the US is keen to address.
Automakers Want Calibration and Continuity
Based on our analysis of comments submitted by automotive companies to the Office of the United States Trade Representative and at recent public hearings, there is strong consensus on what the industry would like to see in USMCA 2.0:
- A renewed USMCA with a framework that establishes certainty over the rules that will affect investments in integrated supply chains.
- Calibration and clarification of content rules, rather than higher thresholds. Automakers consistently oppose abrupt changes in content requirements and instead prefer targeted adjustments that reflect real-world supply chain constraints. They do not want critical commodities, such as rare earths and certain grades of steel, to be included in the formula for calculating foreign, regional, or domestic content.
- An orderly transition period is essential. Each OEM stresses that automotive supply chains should operate on long investment and product cycles and that any changes in rules of origin require multiyear timelines to avoid disruption, cost increases, and unintended noncompliance.
Some Potential USMCA 2.0 Outcomes
In our discussions with global automotive executives, several key topics emerged as developments to watch that will help define the North American auto industry’s future. Most involve content rules. Some examples include:
- Regional Value Content. Many in the industry expect that North American content requirements for finished vehicles crossing borders duty free will increase, probably from the current 75% to around 80%. Regional content requirements are also expected to increase for components, which now range from 65% to 75%. A higher regional value content could translate into more North American jobs and capital investment—with most of those gains going to the US. It is expected that Canada and Mexico will go along with such changes, since their economies would also benefit.
- US Content. Industry executives think there is a good chance that the US will seek to embed US content requirements in the new agreement. Canada and Mexico oppose such actions, fearing that they will be at a structural disadvantage compared with their US peers. If such provisions aren’t included, however, there could be a risk that the US will continue enforcing US content measures unilaterally through Section 232 tariffs, which would in effect limit USMCA regulatory scope for the auto sector.
- China Content Restrictions. Expectations are moderately high that USMCA 2.0 will include caps on Chinese content—perhaps 20% to 25% of the value added—in autos and core parts sold within North America. Goods above this content threshold could either be assessed high tariffs or banned altogether. The scope could include not only automotive goods manufactured in China, but also those made in Chinese-owned or -controlled factories in other nations. This would involve Canada and Mexico sacrificing part of their trade relationship with China in exchange for continued tariff-free access to the US market. Mexico recently decided to implement tariffs of 5% to 50% on goods—including vehicles—from China and other nations lacking free-trade agreements.
How Automotive Manufacturers Can Prepare for USMCA 2.0
Although it will take some time before a new USMCA takes shape, automotive companies must begin preparing for potentially significant change in the North American manufacturing landscape. Here are moves leaders can take now:
Perform a regionalization and localization sprint. Leaders should review the manufacturing, sourcing, and sales footprints of their North American automotive product portfolio, down to each model and trim level, to assess the origin of all content. Estimate the impact of potential changes in USMCA 2.0 tariff and content requirements and other trade measures, such as Section 232 tariffs, under various scenarios. Benchmark the company’s risk exposure against those of industry peers, especially direct competitors.
Develop a roadmap of actions, such as changes in sourcing, manufacturing, and product design, under each scenario. In particular, identify which parts in the supply chain will move the needle for US content, and assess the US supplier landscape. Identify vendors with excess capacity and determine whether they can accept new customers and how quickly. Book that capacity before others do so; once the details of USMCA 2.0 are settled it will be too late or too expensive. Also look to reallocate manufacturing volumes to reduce transoceanic trade and tariff risk exposure. Consider a “local for local” assembly and sales footprint, dedicating more US capacity to serve the domestic auto market while using factories in Europe and Asia to serve those regions. Finally, develop an implementation plan, based on triggers, that enables the organization to correct course as USMCA negotiations evolve.
Build a strong fact base to help shape policy. Prepare a detailed analysis of how potential USMCA automotive trade rule changes would impact the company’s competitive position, assets, and domestic workforce. Engage with North American policymakers to explain the implications of positions on issues such as tariff exemptions, content thresholds, and auto parts affected by Section 232 tariffs.
Increase transparency across the supplier base. Gain visibility into the value chains of the entire supplier network to make it easier to anticipate and manage risks stemming from changes in content rules. Secure more upstream supplier data at critical steps, such as when qualifying new suppliers; consider tariff burden sharing as a lever for securing data.
Refresh the organization’s governance architecture. Consider granting greater independent control and operational steering to the North American organization to allow for greater resilience and flexibility in response to shifting trade rules. Assess the value chain’s reliance on Chinese technology and intellectual property. Emphasize a North American identity.
Broaden trade compliance capabilities. Make trade compliance a strategic C-suite priority. Ensure the company has the people, processes, technologies, funding, and senior stakeholder support to tackle any future trade rules challenges, including those beyond USMCA, such as strategic technologies or critical-mineral sourcing.
The North American automotive industry in nearing a potentially major inflection point that could significantly alter the cost competitiveness of manufacturing and sourcing networks that OEMs and their suppliers have been building and refining for decades. Regardless of the outcome of the USMCA negotiations, US content is likely to play an increasingly important role for vehicles sold in the US. Leaders should start making no-regret moves now to prepare for different scenarios. They should reduce exposure to higher costs, adapt their supply chains, and engage policymakers. Leaders that act now create advantage ahead of their rivals.
