A year ago Canada and Mexico filed a complaint against the United States over how to apply automotive-sector content requirements under the United States-Mexico-Canada (USMCA) free trade agreement, which came into effect in 2020.
The U.S. interpretation of the rules is "inconsistent" with the USMCA, the panel said in its ruling.
"The decision is good for Canada and Mexico," said Flavio Volpe, president of Canada's Automotive Parts Manufacturers' Association.
Canada "is glad to see that the dispute settlement mechanisms in place are supporting our rights and obligations negotiated in USMCA," Canadian Trade Minister Mary Ng said in a statement.
The decision was announced amid a separate USMCA dispute centered on energy that has pitted the United States and Canada against Mexico. Ottawa and Washington say Mexico's nationalist energy policies are putting U.S. and Canadian firms at a disadvantage.
Under USMCA, 75% of a vehicle's components must originate in North America to qualify for tax-free status, but the United States disagreed with how to calculate that number.
Mexico and Canada said if a "core part," such as the engine or transmission, has 75% regional content, the USMCA allows that number to be rounded up to 100% when calculating the broader requirement for an entire car's regional content.
The United States said "core part" content should not be rounded up when determining the content of the entire car.
Under the USMCA, the United States must now agree with Canada and Mexico on how to apply the panel decision or face possible retaliatory tariffs.
Volpe said the decision also is important because it demonstrates that disagreements can be settled under the rules of the new trade pact.
"It shows that the dispute-resolution vehicle within the USMCA works," Volpe said.
(Reporting by Steve Scherer in Ottawa; Additional reporting by Dave Graham in Mexico City; Editing by Paul Simao)
By Steve Scherer
