Trump drops a new poison pill into trade talks

Demand for 50 per cent U.S. content in cars brings formal denunciation from Freeland

The Trump administration has made another demand that could destroy NAFTA talks, this time unveiling a protectionist auto manufacturing proposal considered outlandish and unpalatable by Canada, Mexico, unions and car companies.

The new U.S. proposal creates yet more pessimism about the chances for a successful renegotiation of the continental free trade pact. It is the second major U.S. proposal in two days that Canada and Mexico are unlikely to even consider endorsing.

The latest proposal has experts wondering again whether the Trump team is making unrealistic demands as a bargaining ploy or whether the president who has threatened to terminate NAFTA is deliberately trying to sabotage the negotiations.

“I think it’s one of these poison pills. I just think there’s no way, at all, ever, not-no-how, that Mexico and Canada can accept it. I don’t know what they’re thinking. The auto industry hates this,” said Jon Johnson, a C.D. Howe Institute senior fellow who worked on auto issues during the negotiation of the original North American Free Trade Agreement.

The long-rumoured proposal, discussed at NAFTA renegotiation talks on Friday, would mean a car would have to be composed of 50 per cent American content to avoid tariffs. At present, there is no American-content rule: NAFTA requires only that a car include 62.5 per cent content from North America as a whole.

The U.S. also proposed to raise that North American requirement to 85 per cent. This, too, is considered an unreasonable threshold by the industry given the importance of Asian electronics and other elements found overseas.

Further, the timeline proposed by the U.S. was extraordinarily aggressive. Companies would have just one year to meet the 50-per-cent U.S. requirement, two years to meet the 85-per-cent North American requirement — an unusually rapid implementation period for an industry in which it takes years for companies to turn an idea into a product.

The proposal for 50-per-cent U.S. content was described as “madness” by Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association, and “completely ridiculous” by Jerry Dias, president of the Unifor union representing Canadian autoworkers. The Canadian government views it as so bad and so important that Foreign Affairs Minister Chrystia Freeland’s office issued its first written denunciation of a U.S. demand.

“On NAFTA, we are working for a good deal, not just any deal. That means that we will continue to defend our national interest and stand up for Canadian values. We will not accept proposals that put Canadian jobs at risk,” said Freeland spokesperson Adam Austen. “We will continue to make clear, reasoned arguments based on fact and to put forward pragmatic, mutually beneficial proposals.”

Trump’s negotiators formally unveiled the proposal late Thursday at the fourth round of NAFTA talks in a suburb of Washington. It came a day after the Trump team proposed a “sunset clause” that would automatically terminate the deal in five years if all three countries did not approve it again.

Experts say the proposal is unwise since it would likely lead carmakers to simply choose to get their components from outside the NAFTA zone, killing jobs throughout North America, rather than attempting to meet the overly onerous thresholds.

The tariff on cars that do not meet NAFTA thresholds is a mere 2.5 per cent — hardly enough to compel carmakers to stay put in North America, industry players said Friday.

“They’ll just say, ‘You know what, I don’t need to comply with NAFTA. If my price advantage of sourcing out of South Asia is 7 per cent, why wouldn’t I pay the 2.5-per-cent tariff?’ ” Volpe said.

For that reason, Volpe said, a proposal supposedly designed to protect U.S. jobs would actually hurt them.

“The only ones who are going to win are non-North American suppliers,” he said. “Never mind Canada and Mexico — I know (Trump officials) don’t care. But if you game it out for U.S. industry? Anybody who’s making cars or car parts right now under this scenario, if it was accepted, would be hurt, including workers.”

Johnson said the content proposals are particularly confusing because U.S. demands for auto trade are usually in line with the wishes of the U.S. auto industry. In this case, the industry is aghast.

“Any increase in the rules of origin would add complexity, burden and cost, thus reducing Canada’s competitiveness as well as the competitiveness of the trade bloc as a whole,” the Canadian Vehicle Manufacturers’ Association, which represents General Motors, Ford and Fiat Chrysler, said in a statement.

Dias said the auto proposal, like the sunset clause proposal, is evidence the U.S. is not really interested in making a deal.

“I spend a lot of time with the Canadian team. They view the U.S. proposals as foolish as I do. So they’re not going anywhere. This deal is falling apart,” he said.

The U.S. team also proposed Thursday to include steel, for the first time, on the list of components that count toward the content threshold, an idea designed to boost the U.S. steel industry.

Speaking to the media at a meeting with Mexican President Enrique Pena Nieto on Thursday, Prime Minister Justin Trudeau said Canada is still committed to the talks and “will not be walking away from the table based on proposals put forward.”