By David Ljunggren

OTTAWA (Reuters). -Canada is submitting a formal complaint to the United States regarding its interpretation of the free trade rules for the continent’s auto industry. Another sign of deteriorating relations between the two countries.

Mary Ng, Trade Minister of Canada said Thursday that Canada will join Mexico to request a dispute resolution panel in accordance with the U.S. Mexico-Canada (USMCA), trade pact.

These two countries seek to settle differences over the application of the automotive content requirements in the new treaty. The treaty replaced the North American Free Trade Agreement, (NAFTA), and came into force July 2020.

Canada and Mexico also have concerns about the proposed U.S. tax break for American-based electric vehicle manufacturers. These tax breaks could be detrimental to the North American highly integrated auto industry.

USMCA states that 75% of vehicle components must come from these three countries to be eligible for tax-free status. That’s up from the previous 62.5% in NAFTA.

Mexico and Canada are more open to flexible regulations than Washington. Washington wanted NAFTA to be rewritten when Donald Trump became president, in order for U.S. workers to continue manufacturing jobs.

Ng released a statement saying that the interpretation adopted by the United States… was inconsistent with USMCA, and the understanding of all the participants throughout negotiations.

Tatiana Clouthier, Minister of Economy in Mexico, tweeted her appreciation for Canada’s decision. She said that “the long-standing regional industry must be protected”.

The U.S. Trade Rep was not immediately available to comment.

Trade tensions between Ottawa and the United States were simmering under Trump’s presidency, but Joe Biden’s election as President did not change them. A USMCA panel last week said Canada’s dairy practices violated the accord https://www.reuters.com/world/americas/panel-finds-canadas-practice-reserving-dairy-quotas-inconsistent-with-usmca-2022-01-04 and last month Ottawa launched a challenge https://www.reuters.com/business/canada-challenge-us-softwood-lumber-duties-under-usmca-minister-2021-12-21 against U.S. duties on softwood lumber.

Washington is also unhappy about a proposed Canadian tax on digital services, and reiterated its complaints https://www.reuters.com/business/us-trade-official-raises-concerns-about-canadas-proposed-digital-services-tax-2022-01-12 on Wednesday.