U.S. push for tougher NAFTA rules may backfire, report says
Industry could be hurt by move
While U.S. negotiators are expected to clarify their position on rules of origin in the auto industry during the upcoming round of NAFTA talks, a new report says “there is no need to tighten further NAFTA’s rules of origin for the auto sector” and that a U.S.-specific rule could actually push more production to Mexico.
NAFTA’s rules of origin currently stipulate that vehicles must have at least 62.5 per cent North American content in order to gain duty-free access to all three member countries. According to a Scotiabank Global Economics report released Thursday, more than 75 per cent of all motor vehicle parts used in the region are sourced within NAFTA, well above the 62.5 per cent threshold for vehicles and 60 per cent standard for parts.
“In fact, the North American auto industry’s supply chain network has maintained a relatively stable sourcing pattern, despite the emergence of Asia — especially China — as a large global auto parts exporter,” Scotiabank Senior Economist Carlos Gomes wrote in the report.
U.S. negotiators had demanded that a renegotiated NAFTA must strengthen rules of origin for the auto industry, but it is unclear whether that will include a minimum American content or more stringent rules on tracing the origin or raw materials that go into vehicles.
Foreign Affairs Minister Chrystia Freeland is expected to meet with auto parts manufacturer representatives Friday ahead of the next round of negotiations in Ottawa this weekend.
According to Gomes, tightening NAFTA’s rules of origin — either by raising the 62.5-per-cent threshold or introducing a U.S.-specific content rule — is not necessary.
“Such actions would likely reduce the competitiveness of North American auto production, push more production to Mexico rather than into the U.S., and nudge auto producers to conduct some of their intra-North American trade under most-favoured-nation tariffs rather than bothering to qualify for duty-free access under NAFTA, thereby raising their costs further,” Gomes wrote.
Peter Clark, an Ottawa-based trade consultant who was an advisor during the original NAFTA talks, said he expects the “Detroit Three” automakers — Ford, General Motors, and Fiat Chrysler — will work hard to minimize any potential disruptions to the auto industry, even if it means making concessions. “In trying to minimize disruption, I think they may be prepared to give up some specific content and limit the use of foreign steel in auto parts,” Clark said.