President Donald Trump's administration is considering granting relief from his 25% tariffs on Canadian and Mexican imports to products that comply with the trade pact he negotiated with the two U.S. neighbors during his first term, Commerce Secretary Howard Lutnick said on Tuesday.
Two sources familiar with discussions between the Trump administration and Canadian and Mexican officials said the talks are aimed at exemptions for companies that comply with the 2020 U.S.-Mexico-Canada Agreement's rules of origin, largely - but not exclusively - aimed at automakers.
Two automaker sources said one scenario would call for a 30-day exemption from the tariffs, but automakers would have to demonstrate plans to invest more in U.S. auto production to remain exempt.
Details of potential changes to the tariffs that took effect on Tuesday are far from agreed, the sources said. Trump will decide on any final deal, and since taking office, he has chosen to impose tariffs when given the option to back off.
The 25% levies on Mexican and Canadian goods create particular problems for automakers, who face massive cost increases for parts and vehicles produced in Mexico and Canada bound for the U.S. market.
An exemption from tariffs for cars and trucks that comply with USMCA's complex North American content rules for duty-free access to the U.S. market would be a boon for Detroit automakers Ford (F.N), General Motors (GM.N) and Stellantis.
It also would benefit some foreign brand automakers with large U.S. production footprints, including Honda (7267.T) and Toyota (7203.T), while forcing some competitors assembling cars in Mexico to pay the full 25% U.S. tariffs.
The deal under consideration would also eliminate the 10% tariff on Canadian energy imports, such as crude oil and gasoline, which comply with the USMCA rules of origin, one of the sources familiar with the talks said.
Lutnick, in an interview on Fox Business, said Trump was looking at the USMCA as a way to meet Canada and Mexico "in the middle some way."
"The president is considering giving you relief, if you live under those rules. And if you haven't lived under those rules, well, then you have got to pay the tariff," Lutnick said.
He said a potential arrangement could be announced on Wednesday, but added that Canada and Mexico "have got to do more" to end fentanyl overdose deaths in the United States, the rationale Trump has used for the tariffs.
Speaking to reporters after Trump's address to Congress at the U.S. Capitol, Lutnick said he thought there would be "some movement" on tariffs on Wednesday.
"It will not eliminate the tariffs, but it might modify the tariffs somewhat. That's a decision that will come tomorrow," Lutnick said.
The move would lift a huge burden from Detroit automakers, whose vehicles comply with USMCA's complex 75% North American content rules - requirements agreed by Trump during his first term to keep parts production in the region.
For full duty-free regional access, the rules also require 40% percent of a passenger car's content to be manufactured in the United States or Canada, based on a list of "core parts" including engines, transmissions, body panels and chassis components. The threshold for pickup trucks is 45%.
Ford, GM and Stellantis have been pressing Lutnick to exempt USMCA-compliant vehicles, while the United Auto Workers have pressed the administration to exempt key auto parts from tariffs that could slow auto production.
The Detroit Three held a virtual meeting last week with Lutnick to make the case, two sources briefed on the meeting said.
Trump, in his congressional address on Tuesday, said he had spoken to the top executives at the Detroit Three automakers that day and said tariffs and other policies will result in higher growth and "allow our auto industry to boom."
