Just how ‘North American’ is your car?
NAFTA negotiators focus on ‘fiendishly complex’ rules over vehicle content
WASHINGTON— You can pretty much guess what Foreign Affairs Minister Chrystia Freeland is going to say to the media when she walks into or out of a NAFTA meeting these days.
The day’s talks are, again, going to centre around the issue of automotive “rules of origin.” Those rules are at the “heart” of the North American free trade pact. The three countries are making progress on them, but the rules are “fiendishly complex.”
Indeed, they are really complicated. But we’re going to try to explain them, because they’re central to a deal that is central to the Canadian economy.
What about the auto industry is being negotiated?
A whole lot of things, but we’ll focus on the two main elements. One: the percentage of a car that must come from North America for automakers to avoid a 2.5-per-cent tariff. Two: the rules that lay out how that “North American content” percentage is calculated.
What does “content” mean?
Most of us regular people say a car is “made” in the country where it is assembled at a factory. NAFTA, though, takes into account the parts that go into that assembled car. So if a hypothetical car were to be put together in Detroit but all the parts in it were built in Asia, the car would not meet the North American content minimum and would be subjected to the tariff. Same thing for the parts themselves. They must meet a minimum level of North American content to avoid tariffs.
What are those North American minimums right now?
Under the existing NAFTA deal, 62.5 per cent of a car or light truck must come from North America to avoid the tariff. For auto parts themselves, the minimum is 60 per cent North American content.
How does the math work?
NAFTA includes something called a “tracing list” of various kinds of car components. The list includes brakes, doors, air conditioners, bumpers and a bunch of other standard items.
Even if these items are mostly produced in North America, they may not be entirely North American: a certain percentage of their content may have come from elsewhere. And because they’re on the tracing list, automakers can’t just count them as 100-per-cent North American: the companies must count their partial foreignness in the final calculation.
Some other components are not on the tracing list at all. They include steel, aluminum and, obviously, things not found in cars when the original NAFTA was signed 25 years ago, such as high-tech “infotainment” systems. (The list still in- cludes some obsolete items, such as cassette decks). For these items not on the list, automakers are allowed to count an item as 100-per-cent North American even if a large percentage of it comes from outside the continent.
So what’s the problem?
The Trump administration has argued that the current rules have resulted in an exodus of American manufacturing jobs. Administration officials say 62.5 per cent is too low a minimum for North American content. And they say the tracing list is outdated and too small.
They argue that the absence of important items from the list is allowing automakers to quietly get away with using a lot of nonNorth American content, thus hurting American workers, while still hitting the 62.5-percent threshold.
What has been proposed?
Early in the talks, the Trump administration proposed to raise the minimum North American content to 85 per cent. It also wanted to create a totally new kind of minimum: 50-per-cent content from the U.S. itself.
Canada and Mexico strongly disliked both proposals. Mexican industry officials say the U.S. has now abandoned the proposal for a U.S.-specific content minimum and backed down on the North American content minimum, proposing to raise it to 75 per cent or less, rather than 85 per cent.
But the U.S. has now been said to be seeking new minimum percentages for specific components — say, a rule that more than half of the steel in a car comes from North America. To make things even more convoluted, the three sides have discussed a proposal to factor autoworkers’ wages into the equation in some way. (The goal of the U.S. side is to reduce the incentive to manufacture in Mexico, where wages are much lower.) And Canada has made a proposal involving a formula for allowing engineering and research to be counted toward the North American minimum.
Jerry Dias, president of the Unifor union, says the coun- tries need to be cautious there: give automakers too much credit for such white-collar work, he said, and “you’re sacrificing auto assembly jobs for engineering … you’ll give up 10 jobs to gain one.” How could all this go wrong? The Trump administration says its goal is to set rules that convince companies to choose the U.S. over other countries. But it’s possible, industry experts say, that their effort could have the opposite effect.
The U.S. tariff on cars, 2.5 per cent, is significant but not huge. If the new rules were to make it much more than 2.5-per-cent more expensive for automakers to produce a car while complying with NAFTA, they could simply decide to give up on NAFTA — deciding instead to simply pay the tariff and get their components anywhere else in the world that is cheaper than North America.
“We have to remind our negotiators to work through this in a manner that does not disrupt our supply chains or creates an undue burden on industry that makes it impossible to comply. If that does become the case, then decisions would be made — presumably manufacturers who, given those costs and complexities, say to themselves, ‘Is it worthwhile to continue manufacturing in North America … or go offshore?’ ” said Mark Nantais, president of the Canadian Vehicle Manufacturers’ Association, which represents Ford, General Motors and Fiat Chrysler.
Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association, said it’s a delicate balance for Canadian parts companies: they could well benefit if a new NAFTA required a higher percentage of content to come from North America, but they would be hurt if the new percentage was made so high that sourcing in Canada became uneconomical for automakers.