US auto proposals pose big challenge for NAFTA talks

House Speaker Paul Ryan (R-Wis.) said that he needs a proposed North American Free Trade Agreement (NAFTA) deal in the days ahead if Congress is to vote on it this year. The prospects for meeting that timeframe is unclear. 

Getting a NAFTA  deal now would boost North America’s economies, but trade ministers and negotiators from Canada, Mexico and the U.S. remain divided on difficult issues. Ministers have left negotiating teams to work in Washington and remain on call. They focused on rules for auto manufacturing last week.   

{mosads}The so-called “rules of origin” (ROO) determine which autos can gain duty-free entry under a new agreement. The U.S. has proposed a complex system for which autos will be acceptable, and controversially seeks a minimum wage requirement for portions of the production process. Canada and Mexico pushed back. 

President Trump made a direct pitch for increasing vehicle production in the U.S. to auto executives Friday. He sharply criticized the current NAFTA agreement and threatened new tariffs on imported cars. Automakers are feeling squeezed.

Potential U.S. tariffs on steel and aluminum would raise production costs. Trade clashes with China could limit access to a growing market. The U.S. attempts to shift production from Mexico and Canada to the U.S. could make them less competitive. 

The U.S. administration is in essence trying to forge an “industrial policy” to reshape America’s auto sector via the NAFTA negotiations. The U.S. has reportedly proposed raising the regional content requirement for vehicles to 75 percent from the current 62.5 percent of a vehicle’s content.

It suggested different weights for high-value auto parts and for steel and aluminum, for example. It has also proposed that 40 percent of light passenger vehicles and 45 percent of pickups must be built where wages are $16 an hour or higher. The U.S. suggested relatively short transition periods to implement changes.

Mexico offered a counter proposal last week with lower percentages for regional content, longer transitions and apparently only a soft reference to wages, reflecting how the U.S. proposal would severely damage Mexican auto production.

The U.S. effort to include wage rates aims at Mexico’s lower hourly wages and is particularly controversial. It touches on sensitive questions: What are fair wages in a country whose living costs are much lower than America’s?

Should the U.S. impose wage requirements, not just fair-market rules or practices, on a poorer country?   Previously, the United States has focused on improving the rights of workers through trade agreements.

If the new U.S. proposals were to become part of the agreement, they would add tremendous complexity to measuring if a car meets NAFTA standards for duty-free entry. It could also be a precedent for similar requests to cover other industries or from other countries to challenge U.S. wages. 

It is very important to assess whether proposals that emerge will hurt or harm the U.S. auto industry.

An analysis by Scotia Bank argues that the U.S. effort to tighten rules of origin is “an ill-conceived solution in search of a problem,” which could well make North America’s auto sector less competitive against global peers.

The study argues that U.S. content in auto exports from Mexico and Canada has already generally increased since 2011 and that the U.S. auto industry is doing well: U.S. exports to its NAFTA partners rose by 5 percent a year over the past decade, which is twice that rate of other manufacturing goods.

U.S. employment in the auto industry increased by an average of nearly 6 percent, year on year, since the 2008 crisis, which is more than five-times the growth in overall manufacturing employment, Scotia argues.

The auto industry group, Driving American Jobs, adds that in 2016, automakers manufactured over 1 million vehicles more than the year before NAFTA went into effect and that the sector exported $137 billion in products to Mexico, Canada and the world. 

A study of the U.S. ROO proposals by the Center for Automotive Research (CAR) argues that high content requirements and onerous reporting rules will make U.S.-made and brand vehicles less competitive. It finds that 25-87 percent of the vehicles currently sold in the U.S. might not be able to claim a NAFTA tariff preference.

This could raise costs from $470 to $2,200 per vehicle and result in 60-150,000 fewer vehicle sales annually and fewer U.S. exports. CAR warns this would create incentives for producers to move manufacturing further offshore. 

A proposed system for NAFTA’s auto rules of origin needs careful scrutiny: 

• Will the complexity drive manufacturers to forgo the NAFTA benefit and pay a 2.5-percent tariff? Will it be workable to measure wage rates and content for all the companies in the supply chain?
• What gives us reason to believe that government officials know better than auto companies how to make cars more efficiently?
• Is the U.S. ready to accept others proposing a wage test for America? What if the European Union argues that wages are unfairly low in some U.S. states, for example?
• How much would the new rules raise the prices of vehicles? Would U.S. sales, production and employment decrease or increase? Would manufactures move production out of North America?
• What would the effect be on U.S. consumers?
• Is employment in the auto industry going to shrink because of new technology? How do the proposals help develop America’s workforce and industry for the future? 

It is important to recall that NAFTA supports 14 million U.S. jobs. Modernizing the agreement to include best practices and areas like the digital economy is widely supported. But the cry from U.S. businesses and farmers has been to do no harm.

Ending NAFTA would be a serious economic blow. Studies forecast losses of millions of jobs and well over $100 billion in GDP decline. A new study by AT Kearney found NAFTA withdrawal would cost U.S. consumers $5.3 billion a year.

Businesses, workers and farmers linked by NAFTA with America’s two largest clients, Canada and Mexico, will suffer from continued uncertainty if negotiators miss this opportunity to agree.

Agreement may be delayed until 2019, after Mexico’s new president takes office. It is not clear what positions that Mexican president may take, given the growing frustration with the U.S.

The best option is a good NAFTA agreement now. This moment requires careful scrutiny of the measures being debated and clear messages about the heavy costs if America misses this opportunity.

Earl Anthony Wayne is a public policy fellow at the Wilson Center, a former assistant secretary of state for economic and business affairs and the former U.S. ambassador to Mexico.