Concern is mounting as negotiations to update the North American Free Trade Agreement (NAFTA) enter their fourth round this week. While the American business and agriculture community broadly supports measures to modernize the pact, the Trump administration is pushing a series of proposals that break its pledge to “do no harm” in the negotiations.
One of these proposals is particularly risky: the administration’s plan to tighten dramatically the agreement’s already stringent “rules of origin.” In fact, it would have the opposite effect of the one intended: It would lead to lower U.S. content in our manufactured goods.
As negotiated, the NAFTA already imposes strict rules of origin. For example, in the automotive sector, 62.5% of a car or light truck must be produced within North America to qualify for duty-free treatment.
The NAFTA’s rule of origin for autos is already the highest in any trade agreement in the world, but the administration reportedly would like to raise it to 85%. However, higher requirements for North American content would actually incentivize manufacturers to cease trading under the agreement and instead simply pay the low U.S. most-favored nation tariff (just 2.5%).
Why? Doing so would allow automakers to avoid the administrative costs associated with rules of origin, which include paperwork and the burden of “tracing” the origin of content. It would also incentivize the auto sector to source more inputs from Asia, not fewer, and would thus lead to lost American jobs.
In addition to tightening the NAFTA’s existing North American content rules, the administration is reportedly proposing to add a “U.S. content” requirement of 50%. The concerns named above apply in this area as well, but a domestic content rule in a trade agreement was previously ruled to be a violation of World Trade Organization (WTO) rules in a dispute settled nearly two decades ago. As such, the governments of Canada and Mexico have already indicated there is no way they could accept such a proposal.
What exactly is the problem that the administration is attempting to solve? It isn’t quite clear. The U.S. and North American auto sector has been expanding handsomely and is today one of the world’s most competitive.
Automakers and their suppliers are America’s largest manufacturing sector, and U.S. auto production has more than doubled from 5.6 million vehicles in 2009 to 12.2 million vehicles in 2016, according to a report from the American Automotive Policy Council. Job creation has been robust, the report adds: “Automaker and auto supplier employment in the U.S. increased by nearly one-half from 2011 through 2016, adding nearly 130,000 U.S. jobs.”
This sector is also America’s largest exporter, and worldwide exports of U.S.-built vehicles have more than doubled since the NAFTA entered into force to approximately two million today.
This is a picture of a sector that is prospering, not one that should be saddled with new costs.
Perhaps that’s why there’s such unanimity in opposing these proposals from both U.S.-headquartered and international nameplate auto manufacturers. “NAFTA, by encouraging open trade and investment, has been key to keeping the U.S. auto industry competitive,” as John Bozzella and Mitch Bainwol, the CEOs of the Association of Global Automakers and the Alliance of Automobile Manufacturers, recently wrote in the Washington Post as they expressed their opposition to the proposals.
The same holds for auto parts manufactures. According to a study prepared by the Boston Consulting Group for the Motor & Equipment Manufacturers Association, “job losses could be as much as 24,000 if renegotiations lead to requirements for content from North American and specifically the United States,” Reuters reports.
Approaching the issue from another angle, Politico Pro reports:
A decision by President Donald Trump to withdraw from NAFTA would impose a $10 billion tax on U.S. automakers and lead to consumers buying cars with fewer safety and electronic features, auto industry experts said Thursday…
The impact would be the same if the Trump administration makes the auto rules so tight that the cost of complying with the provisions outweighs the benefit of importing autos and auto parts duty-free under the pact, because the tariff on most of those products is only about 2.5 percent, [according to Charles Uthus, vice president for international policy at the American Automotive Policy Council]. In that scenario, automakers would ignore the auto rules, because they are voluntary, and just pay the tariffs instead, Uthus said.
Indeed, U.S. manufacturers are doing very well under the current rules. The Michigan-based Center for Automotive Research has found that U.S.-content in Mexican manufactured automotive goods has risen from 5% before NAFTA to 40% in 2014—a larger share of a larger pie. A Scotiabank Economics report put the U.S. content share in Canadian assembled autos at almost 60%.
With united industry opposition to this proposal, it’s imperative that the administration recalibrate its approach before it inadvertently undermines our nation’s largest manufacturing sector. We can’t afford to get this wrong.