Trade Compliance at What Cost? Lessons from USMCA Automotive Trade

July 18, 2025

Trade Compliance at What Cost? Lessons from USMCA Automotive Trade

Spencer Bowdle and Fariha Kamal¹

U.S. trade policy shifted dramatically in 2025-the average effective tariff rate increased from 2.3 percent in 2024 to 13.1 percent as of June 13, 2025.² This dramatic rise in tariffs reflects increases for a wide variety of products across all trading partners. Along with widespread tariff increases, however, U.S. importers now face additional compliance costs to conform with increasingly complex trade regulations and reporting obligations. This Note quantifies the additional compliance costs of the recent trade regulations.³

We utilize changes in the rules of origin (RoO)-the criteria needed to determine the national source of a product-when the United States-Mexico-Canada Agreement (USMCA) replaced the North American Free Trade Agreement (NAFTA) in 2020 as a case study to estimate the higher trade compliance costs in 2025. In particular, we focus on changes in RoO for automotive products.⁴ Comparing changes in the RoO for automotive products under the USMCA and NAFTA provides an especially salient context where the RoO became more stringent, necessitating additional origin, documentation, and filing requirements, comparable to the various content and reporting requirements under the new tariff actions.⁵

We posit that, conditional on sourcing from Canada or Mexico, the stricter RoO under the USMCA changed incentives for U.S. importers to claim preferential treatment relative to existing most-favored-nation (MFN) tariff rates. Thus, we examine the relationship between automotive product-level imports sourced under the two preferential trade agreements (PTAs) over time and their associated MFN tariff rates. We infer the cost of added compliance to U.S. importers as the average MFN rate at which we observe sharp declines in imports claiming preferential treatment post-USMCA.⁶ Our estimates indicate that additional trade compliance costs, expressed as an ad valorem tariff, can range between 1.4 and 2.5 percent.⁷ This implies potential annual costs between $39 and $71 billion faced by the manufacturing sector due to the 2025 tariff actions.

Changes in Automotive Product Rules of Origin and Comparability of Compliance Burden with 2025 Tariff Actions

The RoO provisions in a PTA determine the eligibility status of goods for preferential treatment-i.e., reduced or zero duties. NAFTA entered into force on January 1, 1994, and was replaced by the USMCA effective July 1, 2020. Under the USMCA, the RoO provisions became more stringent for automotive products (Table 1).

Table 1. Rules of Origin for Automotive Products

The threshold for existing regional value content-i.e., the share of a product's value originating in North America-increased by over 10 percentage points moving from NAFTA to the USMCA, and two new requirements were added:

1. labor value content: almost half of the production value of a vehicle must be manufactured at a facility where workers earn at least $16 per hour.
2. steel and aluminum procurement: seventy percent of an automaker's purchase value of steel and aluminum must originate in North America.

In addition to the regional value content certification of origin, three new certifications (labor value content, steel, and aluminum certifications) must be submitted to receive preferential treatment.⁸ Thus, the stricter RoO imply potentially higher compliance costs due to higher content requirements and administrative costs of obtaining and filing the relevant documentation.

The higher compliance costs implied by the stricter RoO are comparable with those implied by the new tariff actions in 2025 because of certification of content requirements associated with the tariffs (Table 2) and the general increase in filing requirements per shipment.⁹ Thus, we use the estimates of higher compliance costs for automotive imports under the USMCA to infer the additional compliance costs under the new tariff actions.

Table 2. 2025 Tariff Actions with Content Requirements

Data Description: Automotive Imports from Canada and Mexico

Our analysis focuses on automotive products imported from Canada and Mexico due to the increase in their associated RoO under the USMCA compared with NAFTA, and because of meaningful variation in MFN rates across detailed products within the automotive category. We utilize data on automotive imports at the eight-digit Harmonized Tariff Schedule (HTS) level published by the U.S. Census Bureau and accessed through the USA Trade Online tool (U.S. Census Bureau, 2025). We use tariff schedules, also at the eight-digit HTS level, published by the U.S. International Trade Commission (USITC, 2025). Our analysis spans 2015 through 2024.

Automotive products are an important share of total U.S. imports from Canada and Mexico. In 2024, automotive products accounted for 14 percent of total imports from Canada and 37 percent of imports from Mexico (Figure 1). Passenger cars account for most automotive imports from Canada, while auto parts account for most of automotive imports from Mexico.¹⁰ The share of all automotive product imports from Canada and Mexico exhibit a short-lived decline after 2020. We next explore the post-USMCA trade patterns in more detail.

Compliance Shares under NAFTA versus the USMCA

Auto industry stakeholders have cited greater administrative burden under the USMCA because of the new RoO. As one commentator described, "the burden and costs of certifications is so high that some suppliers choose not to perform the necessary calculations and documentation and instead simply label parts as 'non-originating' even if the good might otherwise qualify under the USMCA" (Office of the U.S. Trade Representative, 2022; pp. 9-10).

We begin by plotting the share of imports that are "originating" or "compliant" under the PTAs (henceforth, compliance shares) over time to seek visual evidence of any systematic breaks in compliance shares after the USMCA goes into effect.¹¹ Figure 2 shows automotive product imports from each origin country (Canada and Mexico) that are entered under preferential treatment as a share of total auto imports by origin in six-month intervals beginning in 2015 through the end of 2024. We use six-month intervals since the USMCA went into effect in the latter half of 2020. We see a sharp decline in the share of compliant imports from both Canada and Mexico when the USMCA goes into effect as indicated by the dashed vertical line. The decline persists through 2023, consistent with a three-year phase-in period granted for automotive products (U.S. Customs and Border Protection, 2025).

Figure 3 further decomposes the compliance shares by broad product categories within automotive products. Compliance shares from Canada declined for trucks and auto parts around USMCA implementation with almost immediate return of truck shares to pre-USMCA levels. Compliance shares from Mexico show a marked decline for both passenger cars and auto parts with increases in 2024, although they remain well below pre-USMCA levels.

Compliance Shares under NAFTA versus the USMCA and Preference Margins

Next, we examine whether the changes in compliance shares vary systematically with the preference margin under the PTAs to infer the cost of trade compliance. The preference margin is the difference between the MFN tariff rate and the tariff rate under the PTAs-i.e., 0 percent.¹² The intuition is that the preference margin, or MFN rate, for a product should only incentivize U.S. importers to select into non-compliant status if the costs of incurring the MFN tariffs are lower than the costs of complying with the RoO. In the context of examining changes in RoOs, we hypothesize that U.S. importers will be incentivized to divert imports from compliant (under NAFTA) to non-compliant (under the USMCA) status only if the costs of complying with the new and more stringent RoO outweigh the savings from avoiding MFN tariffs.¹³ Thus, trade compliance costs can be inferred as the average MFN tariff rate at which compliance shares decline post-USMCA.

Descriptive Evidence

We plot the compliance share from each origin country within four tariff bins (Figure 4).¹⁴ The MFN tariffs vary between 0 and 25 percent, with a significant mass of products at 2.5 percent.¹⁵ Bin 1 comprises of products with MFN rates greater than 0 percent but less than 2.5 percent-effectively 1.4 to 2.3 percent; bin 2 comprises of products with MFN rate of exactly 2.5 percent; bin 3 comprises of products with MFN rates greater than 2.5 percent but less than 25 percent-effectively 2.7 to 6.4 percent; and bin 4 comprises of products with an MFN rate of 25 percent.

A stark pattern emerges. Compliance shares are stable and close to 100 percent in the highest tariff bin followed by only slightly lower shares in the third highest tariff bin.¹⁶ In the next two lowest tariff bins, we see a visible decline in the compliance shares around the USMCA transition period, with the largest declines in compliance shares seen in products that face MFN tariffs between 1.4 and 2.3 percent followed by products in the 2.5 percent tariff bin.¹⁷ In summary, Figure 3 shows that overall compliance shares are positively correlated with MFN rates; and conditional on a baseline compliance share, changes in compliance shares post-USMCA are negatively correlated with MFN rates.

Long Difference

Motivated by the patterns in Figure 3, we estimate the following specification,

$$$$ \Delta_{2024-2019} \left(\frac{Imports^{PTA}}{Imports^{All}}\right)_{pc} = \alpha + \sum^{3}_{b=1} \beta_{b} (Tariff\ Bin)_{pb} + \delta_{c} + \varepsilon_{pc} ,\ (1)$$$$

where $$\left(\frac{{Imports}^{PTA}}{{Imports}^{All}}\right)_{pc} $$ is the compliance share for an eight-digit Harmonized Tariff Schedule (HTS) product code $$p$$ (that falls into tariff rate bin $$b$$, as defined for Figure 3) imported from country $$c$$(Canada or Mexico); $${Tariff\ Bin}_{pb}$$ is an indicator variable equal to 1 when product $$p$$'s tariff bin equals $$b$$ and 0 otherwise; and $$\delta_c$$ captures country fixed effects. Products with 0 percent MFN rates serve as the left-out tariff bin category and we exclude all observations with 25 percent MFN rates from all regressions.¹⁸

We consider the change from 2019 through 2024. The USMCA became effective in the middle of 2020, which is also the year when the pandemic affected global trade patterns. Thus, we use the last full year that NAFTA was in effect as the base year. We consider 2024 as the end of the change period because there was a three-year phase-in period for full compliance with USMCA requirements.¹⁹

The coefficients of interest are $$\beta_b$$ for tariff rate bins ($$b$$) 1 through 3, which capture the change in compliance share (2019 to 2024) for products with non-zero MFN tariff rates. We expect $$\beta_b$$ for each bin but attenuating toward zero for higher tariff rate bins, such that higher the MFN rate, the higher the incentive to continue claiming duty-free treatment even with stricter compliance requirements.

Indeed, we find larger declines in the average compliance shares in the lower tariff bins. As shown in Table 3, compliance shares decreased by about 21 percentage points for products facing tariffs in bin 1 compared to products in the left-out category while shares decreased by about 10 percentage points for products facing tariffs in bin 2 compared with products in the left-out category. There is no statistically significant difference in the change in compliance share of products facing tariffs in bin 3 compared with the left-out group.

Table 3. Change in Compliance Shares and Preference Margins

Difference-in-Differences

We next implement a generalized difference-in-differences (DiD) specification using our entire sample period, 2015 through 2024, to confirm that the patterns documented in Table 3 are robust to the choice of years, as follows,

$$$$ \left(\frac{{Imports}^{PTA}}{{Imports}^{All}}\right)_{pct}=\ \alpha+\sum_{b=1}^{3}{\beta_b\left(Tariff\ Bin\right)_{pb}\times P\ o\ s\ t_t}+\delta_p+\delta_{ct}+\varepsilon_{pct}.\ \ \ \ \ \ (2) $$$$

Time $$t$$ is a half year; the product-bin indicators $${Tariff\ Bin}_{pb} $$ are now interacted with $$Post_t$$, an indicator variable that equals 1 after the USMCA implementation (second half of 2020 and onward) and 0 otherwise; and we include product ($$\delta_p)$$ and country-by-time ($$\delta_{ct}$$) fixed effects.

The point estimates, shown in Table 4, are qualitatively similar to those in Table 3, which reports comparisons of the simple difference in compliance shares between 2024 and 2019 by tariff bin.²⁰ In the sample of products for which we have consistent classification over the sample period (Table 4, column 2), the coefficient on tariff bin 3 is statistically significant, though smaller in magnitude compared to the other tariff bins.

These results are consistent with conjectures that it may be more cost-efficient for importers to pay low MFN tariffs than to incur the costs to meet the intricate USMCA RoO requirements (Wong and Kitamura, 2024).²¹

Table 4. Compliance Shares and Preference Margins

What Can We Learn about the Higher Trade Compliance Costs in 2025?

Automotive RoO changes under the USMCA provide a suitable laboratory to study the recent increases in trade compliance costs given the comparability in compliance complexity associated with the new U.S. trade actions enacted in 2025. Our analysis indicates that the additional associated costs of meeting content requirements, providing necessary documentation, and fulfilling all reporting obligations due to the new tariff actions can range between 1.4 and 2.5 percent on an ad valorem tariff equivalent basis.

Two implications arise from this result. First, even in the absence of new tariffs, increased requirements to comply with, document, and report product origins alone would have doubled the average effective tariff rates facing U.S. importers in 2025 compared to 2024.²² Second, all else equal, USMCA compliance shares in automotive products are likely to increase in the presence of the new 25 percent auto tariffs under Section 232 (Executive Office of the President, 2025c, 2025f), at least in the immediate term when supply chains are harder to reorient. However, the degree of increase towards full USMCA compliance will depend on firms' abilities to map the source of parts and components across intricate supplier networks that meet regulatory requirements.

We consider our estimates to be a lower bound because in addition to the higher content and reporting requirements, U.S. importers must now navigate increased complexity in the tariff schedule. Instead of a single MFN tariff rate for a product, importers now face multiple rates for the same product that vary by source country. This increased complexity not only adds to the administrative burden but also potentially increases the risk of errors and associated penalties, further elevating the true cost of compliance for U.S. importers. Using our lower bound estimates, the additional cost of compliance under the new tariff actions can still be sizeable. Figure 5 displays estimates of the additional annual compliance costs based on 2024 import patterns across the manufacturing sector.

The potential cost of additional compliance faced by the manufacturing sector each year, based on an ad valorem tariff equivalent of 1.4 and 2.5 percent, is between $39 and $71 billion, respectively.²³ The three industries facing the highest increase in compliance costs are Computer and Electronic Products, Transportation Equipment, and Chemicals. Together, these are economically important industries accounting for about a third of total value of shipments and employment in the manufacturing sector.²⁴

Our analysis indicates that additional costs of compliance underlying increasingly complex trade regulations can be economically significant and thus should be explicitly considered and weighed against the intended benefits when crafting trade policies.

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