WASHINGTON/MEXICO CITY (Reuters) - The agreements struck between the United States and Mexico on trade would allow President Donald Trump to impose punitive “national security” tariffs of up to 25 percent on imports of Mexican-made cars, sport utility vehicles and auto parts above certain volumes, auto executives and other sources said.

FILE PHOTO: A transport truck carries new Toyota trucks through an inspection station after clearing U.S. customs from Mexico at the border in Otay Mesa near San Diego, California, U.S., April 28, 2017. REUTERS/Mike Blake/File Photo

The United States and Mexico agreed on Monday to overhaul the North American Free Trade Agreement (NAFTA), pressuring Canada to accept new auto trade and dispute settlement rules to remain part of the three-way pact.

A previously unreported side agreement between the two countries would allow the United States to pursue national security tariffs on annual Mexican car and SUV imports of over 2.4 million vehicles, a number that significantly exceeds last year’s total imports. The side deal would allow national security levies on auto parts imports above a value of $90 billion per year on the same grounds.

Mexican Economy Minister Ildefonso Guajardo said on Wednesday the “side letter” protected Mexico’s auto industry and gave it scope to grow before facing any potential national security tariffs.

The Trump administration in the coming weeks aims to announce the results of a probe into whether imports of autos and parts pose a national security risk.

The study could be used to justify 25 percent U.S. tariffs on automotive imports from North America, Asia and Europe on the premise that protecting the U.S. auto industry is vital to national security under a Cold War-era trade law.

Automakers are concerned that the agreement signals the United States might well use national security tariffs to win concessions from the European Union and Japan as well. They have said the tariffs could cost hundreds of thousands of jobs and dramatically raise vehicle prices.

A separate side agreement lays out a possible scenario in which the United States increases its normal “most-favored nation” tariffs on autos, currently 2.5 percent. A potential new, unspecified rate would be applied to vehicles that do not meet the existing or revamped NAFTA.

MEXICAN EXPORT CAP

Mexico reserves the right to challenge the U.S. use of “national security” tariffs at the World Trade Organization, people briefed on the talks said.

Exports of cars and SUVs from Mexico would face a 25 percent U.S. tariff if they exceed 2.4 million vehicles and the United States imposes the national security tariffs, the sources said. Below the cap, vehicles that comply with new, tougher regional content requirements could enter the U.S. duty-free.

Vehicles within the cap that fail to comply with the new, tougher content rules would be subject to a 2.5 percent tariff, the sources said.

In 2017, nearly 1.8 million cars and SUVs were exported from Mexico to the United States.

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The sources did not want to be identified because the details of the agreement have not been officially released.

U.S. officials have said the agreement is aimed at pulling more auto industry jobs into the United States and Mexico. Terms of the deal are not final, and could change depending on the outcome of negotiations between the United States and Canada, as well as other factors.

Duty-free auto parts exports from Mexico to the United States could be capped at $90 billion a year under the agreement, said Ann Wilson, senior vice president of government affairs at the Motor and Equipment Manufacturers Association.

The figure exceeds current levels, but parts shipments above that quota could be subject to 232 tariffs, Wilson said.

Mexican pickup trucks that do not comply with regional content quotas already pay a 25 percent duty. It was not clear whether they could also be subject to an additional quota.

Economy Minister Guajardo said imposing 232 tariffs would be “massively criticized” inside the United States, but that just in case, Mexico had protected its current U.S. export capacity with the “side letter” that also allowed room for growth.

“On top of that (current export capacity) we put in an additional 40 percent of growth,” he told Mexican radio.

Moises Kalach, head of the international negotiating arm of Mexico’s CCE business lobby, said Mexico had a “fall-back plan” if the 232 tariff was imposed. “But there’s also the possibility that Mexico is exempted from the 232,” Kalach told Reuters.

It is not clear how the quotas would be counted or administered.

The deal also sets quotas for carmakers’ use of U.S.-made steel and aluminum, the sources said. Vehicle components would be subject to regional content quotas at different levels, depending on the type of part or system. Engines and transmissions, the highest-value systems in a vehicle, would have a 75 percent regional content quota, the sources said.

A United States Trade Representative spokeswoman declined to confirm or comment.

The tariff mechanism in the preliminary U.S.-Mexico accord would likely change little for Detroit automakers such as General Motors Co, which builds large Chevrolet Silverado and GMC Sierra pickup trucks at a complex in Silao, Mexico.

However, Asian and German automakers, and automakers and suppliers that want to expand production in Mexico could be at a disadvantage, and be forced to source more production of both vehicles and engines in the United States.

The revised trade agreement is expected to take effect in 2020 and be phased in over five years, the people familiar with the proposal said.

WHAT IS NORTH AMERICAN-MADE?

A cap on Mexican vehicle exports to the United States would push automakers and suppliers to deal with a range of new challenges.

The rules would encourage efforts to certify parts as North American-compliant even if they include content from elsewhere. That could add hundreds of millions of dollars in costs for automakers over the next decade, industry officials said.

The new cap on total vehicle exports could spur a rush for companies to announce additional production capacity in Mexico in the coming months to try to “lock in” space under the cap before the agreement takes effect, auto industry officials said.

The new content rules and a new requirement that 40 to 45 percent of a vehicle be produced by workers earning $16 an hour or more, far higher than current Mexican wages, could lead automakers to try to raise vehicle prices.

The details of the auto trade agreement are critical to automakers and vehicle parts makers.

For example, the Trump administration said wages of U.S.-based engineers could be counted toward the regional content quota - benefiting the Detroit Three automakers and rivals that have established engineering operations in the United States.