NAFTA’s ‘rules of origin’ are killing American jobs

As the North American Free Trade Agreement negotiations unfold, there is a lot of loose talk being exchanged about automobile parts going back and forth among the United States, Canada and Mexico.

NAFTA supporters assert that the U.S. content in cars assembled in Canada and Mexico is particularly high and that therefore our $70 billion-plus trade deficits with our NAFTA partners are not worrisome.

That would be a great argument if it were correct. But it isn’t. That argument is neither true of motor vehicles nor of manufactured goods in general.

A new study by Anne Flatness and Chris Rasmussen of the Office of Trade and Economic Analysis within the Commerce Department proves its falsity. The study, based on Trade in Value Added data recently released by the Organization for Economic Cooperation and Development, shows that between 1995, the year after NAFTA went into effect, and 2011, U.S. content of manufactured goods imported from Canada dropped significantly — from 21 per cent to 15 per cent. U.S. content in goods imported from Mexico fell even more — from 26 per cent to 16 per cent. The data is available only until 2011, but there is no reason to think that the situation has improved since then.

The numbers for the automobile industry specifically are similar — not surprising because automobiles account for 27 per cent of total imports from Canada and Mexico. Indeed, automobiles drive the U.S. trade deficit with those countries; the United States would enjoy a trade surplus with its NAFTA partners were it not for the trade deficit in autos and auto parts.

These data debunk the claim that U.S. content in the form of parts is so high that we shouldn’t worry about headline gross-deficit figures.

Nor is this a trivial concern: Canada and Mexico combined are the largest source of manufactured products imported into the United States, accounting for nearly a quarter of our imports.

This problem is particularly troubling because the previous U.S. share of the content found in imports from Canada and Mexico is largely being absorbed by non-NAFTA trading partners, not by Canada and Mexico themselves. The share of content from foreign countries other than Canada and Mexico has almost doubled in our imports from Mexico, from 14 per cent to 27 per cent. The non-NAFTA content of our imports from Canada likewise rose, from 12 per cent to 21 per cent.

We cannot forget that the point of a free-trade agreement is to advantage those within the agreement — not to help outsiders. Instead, NAFTA has provided entry into a bigger market for outside countries. While NAFTA has achieved its goal of increasing three-way trade in absolute terms, American workers and businesses are not benefiting in a way that is fair and reciprocal.

What does this mean for U.S. jobs?

Hundreds of thousands of Americans go to work every day in the automobile manufacturing industry. The declining U.S. share of content in imports from Canada and Mexico puts those jobs at risk. The United States accounts for an overwhelming share of the total NAFTA auto market today — 83 per cent, in fact — yet U.S. workers are not reaping the benefits of that purchasing power. So, why is this happening? NAFTA included “rules of origin” provisions that were intended to restrict the non-NAFTA content in final goods. Yet the numbers above show that the opposite has, in fact, happened.

Unfortunately, NAFTA rules of origin on automobiles listed the exact parts to which the rules of origin applied, and many of those parts are no longer used. Another reason is that the rules include a concept called substantial transformation, which means that if further processing of a non-NAFTA item is done by a NAFTA partner, the non-NAFTA items are “transformed” and are deemed to have been produced in the United States, Canada or Mexico.

These facts are why U.S. trade representative Robert Lighthizer announced that two major objectives for NAFTA are raising the total NAFTA content requirement and raising the U.S. share of that requirement, especially in autos and auto parts.

Autos and auto parts are particularly important because our combined trade deficit in autos and auto parts from Canada and Mexico is $84.6 billion annually, which is the vast majority of our total trade in goods deficit with our neighbours. Only $14.6 billion of that deficit is offset by surpluses in other product categories. That is why we have a NAFTA net trade deficit in goods of $70 billion.

If we don’t fix the rules of origin, negotiations on the rest of the agreement will fail to meaningfully shift the trade imbalance. Our nation’s ballooning trade deficit has gutted American manufacturing, killed jobs and sapped our wealth. That is going to change under President Donald Trump, and rules of origin are just the beginning.