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With help from Steven Overly

— How the United States responds to a ruling this week in a high-profile dispute over the automotive rules of origin could have serious consequences for the long-term credibility of the two-year-old agreement that the Trump administration negotiated to replace NAFTA.

— The North American leaders have a long list of other trade disputes involving energy and agricultural trade they could discuss at their summit meeting today and tomorrow in Mexico City, but no breakthroughs are expected.

— Canada is beginning a public consultation on whether to launch free trade talks with Ecuador, moving ahead of the United States, which has less ambitious plans for increasing bilateral trade with the Andean nation.

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USMCA PANEL REPORT EXPECTED BY THURSDAY: A long-awaited ruling that reportedly goes against the United States is expected by Thursday in the case that Canada and Mexico brought against the strict U.S. interpretation of the automotive rules of origin in the two-year-old U.S.-Mexico-Canada Agreement.

The impending decision comes as President Joe Biden and Canadian Prime Minister Justin Trudeau are in Mexico for the 10th North American Leaders summit today and tomorrow.

It also follows two recent rulings against the United States at the World Trade Organization — one involving Trump’s steel tariffs and the other his requirement that Hong Kong products be labeled as “Made in China.” USTR has said it won’t comply with either decision because both U.S. actions were taken on national security grounds. 

High Anxiety: That has caused concern that the Biden administration also might not comply with an adverse ruling in the USMCA autos case, Bill Reinsch and Scott Miller, the “Trade Guys” at the Center for Strategic and International Studies, noted on their most recent podcast.

“The question will be, what is the U.S. going to do? If they reject the [ruling], they are really going to undermine the agreement,” Reinsch said. Whenever any party loses a dispute, they have “a decision to make: Am I going to reaffirm the system and comply, or am I going to thumb my nose at it? And that's what we're facing,” he added.

Eric Farnsworth, head of the Washington office for the Council of the Americas, made the same point during a discussion on Friday. “The credibility of USMCA, as a unifying trade agreement, depends on the full compliance of all three parties. That’s true when you win a case. It's also true when you lose a case,” he said.

Silent Running: USTR generally does not comment on rulings before they are public, and has also declined to say whether it would comply with an adverse decision in the autos case, which involves the calculation of regional content requirements for passenger cars and trucks.

Canada and Mexico agreed in the USMCA to stricter regional content rules than in NAFTA, the previous North American trade deal. But they argue the U.S. interpretation of those new rules goes far beyond what the three countries negotiated.

MORE DISPUTES IN THE WINGS: There also are North American trade frictions on the energy and agricultural front as Mexican President Andrés Manuel López Obrador hosts Biden and Trudeau for two days of talks.

Energy: Both Canada and the United States have raised concerns about Mexican energy policies that they say discriminate against foreign investors in the fossil fuel and renewable energy sectors. The three countries have been discussing a possible negotiated settlement for months without success, raising the possibility that Canada and the United States could soon ask for a dispute settlement panel to hear their complaint.

“I don't want to get ahead of the president but clearly trade issues will be on the agenda next week,” White House National Security spokesperson John Kirby told reporters on Friday, when asked about the energy dispute.

Dairy: The United States also remains frustrated over Canadian dairy market access barriers, despite appearing to win a USMCA case it filed against Ottawa in 2021. Last month, U.S. trade officials signaled their intention to seek a new dispute settlement panel to challenge how Canada manages its dairy import regime.

That may be the best option for the United States because “I don’t see us moving on dairy,” Louise Blais, senior special adviser for the Business Council of Canada, said during Friday’s COA-hosted discussion. “I am not sensing any political will in Canada to make a change on our supply management” program.

Corn: U.S. farm groups and members of Congress also want the Biden administration to begin dispute settlement proceedings against Mexico over a decree issued by López Obrador in 2020 that threatens to cut off U.S. corn exports to that country.

That issue is critical to U.S. corn producers, since Mexico is their second largest export market. However, it would force López Obrador to backtrack on a high-profile pledge to phase out all imports of genetically-modified corn for human consumption by 2024. Most corn grown in the U.S. is genetically-modified.

Business groups weigh in: In a joint open letter to the leaders, business groups from the U.S., Canada and Mexico called for a quick resolution of all four disputes and for the three governments to take advantage of “a limited window of opportunity to capitalize on [the region’s] unparalleled competitive advantages.” It was signed by Consejo Coordinador Empresarial, the U.S. Chamber of Commerce and the Business Council of Canada.

Supply chains: Along those lines, Kirby said Biden planned to discuss how to work together to strengthen and expand North American supply chains for semiconductors, critical minerals and electric vehicles, which are seen as key to the clean energy transition.

Meeting schedule: Biden is holding bilateral talks with López Obrador today and with Trudeau tomorrow. The three leaders and their wives will have dinner tonight. The actual North American Leaders summit will take place tomorrow after the bilateral talks are concluded.

For more on the challenges Biden faces on his first visit to Mexico as president, check out this story by our POLITICO colleagues Myah Ward and Jonathan Lemire.

SIX PILLARS OF ‘DELIVERABLES’: While no big breakthroughs are expected on any of the trade disputes, there will be deliverables in six different pillars, Brian Nichols, assistant secretary of State for Western Hemisphere affairs, said Friday at a Wilson Center event.

Those include diversity, equity and inclusion; climate and environment; competitiveness; migration and development; health; and regional security, he said.

Tai won’t be there: U.S. Trade Representative Katherine Tai won’t be part of the U.S. delegation attending the talks, in another sign that trade is taking a back seat to other issues.

APEP teaser: Nichols also said the administration would “soon” be announcing more details about the Americas Partnership for Economic Prosperity initiative that Biden launched last June at the Summit of Americas in Los Angeles.

That’s the Western Hemisphere companion to the Indo-Pacific Economic Framework discussions that got underway last year. However, there has not been much action on APEP since Biden’s announcement seven months ago.

CANADA EYES ECUADOR FTA: Meanwhile, Canada has launched public consultations on a possible free trade agreement with Ecuador, the Canadian government announced Friday.

That’s an order of magnitude beyond what the Biden administration has been willing to consider with the Andean nation, despite some interest in Congress in an FTA.

Still, Canada’s action could stir U.S. competitive juices, like when it struck free trade deals with Chile and Colombia before the United States did, Farnsworth told Morning Trade.

“As the U.S. dawdles, Canada moves in to capture markets. Eventually, the U.S. awakes and does its own trade deals. Hopefully, the same will happen here with Ecuador,” he said.

U.S., JAPAN KICK OFF FORCED LABOR TASK FORCE: There’s a new task force in town. U.S. Trade Representative Katherine Tai and Japanese Minister of Economy, Trade and Industry Nishimura Yasutoshi signed a memorandum of cooperation on Friday to tackle forced labor and human rights abuses in global supply chains.

The newly created body plans to “exchange information and share best practices” across both governments, with the American members including officials from the departments of Commerce, Labor and Homeland Security, as well as USTR and the U.S. Agency for International Development.

Additional countries will be invited to join the task force in the coming months. “Doing trade the right way means strength in numbers — having our allies and partners work alongside us,” Tai said at Friday’s signing ceremony.

Bigger forced labor strategy MIA: The event was a reminder that it’s been nearly a year since Tai announced plans to develop USTR’s “first-ever focused trade strategy to combat forced labor.” So, that’s another thing to look out for in coming weeks and months.

Ethanol angle: The two trade chiefs discussed the potential for expanded U.S. ethanol sales to Japan during their meeting on Friday, USTR said in a readout.

EV tax credits: They also discussed Japan’s concerns about the discriminatory nature of U.S. electric vehicle tax credits, as well as their desire to coordinate efforts as the U.S. hosts APEC in 2023 and Japan hosts the G-7 meetings, USTR said.

IPEF shout-out: Tai and Yatsutoshi reviewed negotiations on the proposed Indo-Pacific Economic Framework and called for “an ambitious negotiating schedule” to conclude the talks, USTR said.

QUARTZ CASE UPDATE: Companies involved in an antidumping case on quartz surface products from India have won a partial victory in the Commerce Department’s latest administrative review. The Wall Street Journal editorial page had described the case as an example of “Trade Bureaucrats Gone Wild.”

Antique Marbonite, one of the two Indian companies that Commerce has been using to set the rate for other exporters, still faces a duty rate of 323 percent, up from 5 percent previously. But 51 other companies that Commerce threatened with a duty of 161 percent will only receive a 3.19 percent duty rate, said Paul Nathanson, a senior principal at Bracewell LLP.

— Tai will swear in Doug McKalip as USTR’s chief agricultural negotiator today, USTR said in its “week ahead” advisory to reporters.

— Washington Post contributing columnist Sebastian Mallaby makes the case for the Biden administration to “deploy free trade as a weapon for isolating enemies and cementing friendships.”

— China’s trade restrictions on Australian wine, lobsters and other commodities could be the next to ease amid a warming of diplomatic ties and expectations that Beijing will soon resume imports of coal, Bloomberg reports.

— Argentina and China have formalized the expansion of a currency swap deal, allowing the South American country to increase its depleted foreign currency reserves, Reuters reports.

— Canada’s trade balance unexpectedly swung into deficit in November, as the country’s energy producers shipped less product amid a drop in prices, The Financial Post reports.

— Mexico is resisting pressure from the EU to sign off on a trade deal that was agreed four years ago, arguing legal changes recently proposed by Brussels will slow down the approval process, the Financial Times reports.

— The U.S. and India will hold their annual Trade Policy Forum on Wednesday, The Economic Times reports.

— Malaysia aims to boost bilateral trade with neighboring Indonesia including cross-border investments in a number of key sectors, Xinhua reports.

— South Africa’s defense minister has criticized the U.S. for trying to bully African countries from doing business with Russia, Eyewitness News reports.

— Kenya’s trade minister said Africa, and his country in particular, would not allow its resources to be exploited in the U.S.-Chinese trade war, Asharq Al-Awsat reports.

THAT’S ALL FOR MORNING TRADE! See you again soon! In the meantime, drop the team a line: [email protected], [email protected] and [email protected]. Follow us @POLITICOPro and @Morning_Trade.