A severe tightening would make it harder for North American carmakers to compete with Asian exporters.
By Oso Oseguera
Robert Lighthizer, the United States Trade Representative, wants renegotiation of the North-American Free Trade Agreement (NAFTA) to speed up. When the sixth round of talks ended on January 29th with only three chapters agreed, he griped: “We owe it to our citizens, who are operating in a state of uncertainty, to move much faster.” But given the changes he wants, any more speed risks a crash.
The Trump administration wants three big changes: a higher regional-content requirement of 85%; a new requirement that 50% of content is American; and a vast expansion of the tracing list to include everything.
The higher content requirements should shelter local component-makers from foreign competition, and could encourage companies like Toyota, Nissan and Volkswagen to source more of their parts regionally. Updating the tracing list to include steel and electronic components, which are mostly made in Asia, should also encourage regional sourcing. The American-content requirement is supposed to ensure that any returning jobs do not flow to Mexico, where wages are lower.
Canada and Mexico have greeted these proposals with derision. An America-specific content requirement is politically impossible. And including all of a car’s thousands of components in the tracing list would be a bureaucratic nightmare and is “absolutely unrealistic”, says Eduardo Solis, president of the Mexican Association of the Automotive Industry.
For components where the car industry makes up only part of overall demand, as with lithium-ion batteries, extracting the necessary information from suppliers could be tough. Flavio Volpe, president of the Canadian Automotive Parts Manufacturers’ Association, an industry group, points out that it could lead to “absurd” questions. “Is the raw material petroleum? Or do you have to know where the dinosaurs died?”
Ramping up regional-content requirements quickly would wreak havoc on the industry’s supply chains, especially given how tight the existing rules are. The costs of compliance already mean that 20% of drive-axles and 25% of radiators by value of imports move within the region without NAFTA benefits they are in theory entitled to. A severe tightening would make it harder for North American carmakers to compete with Asian exporters, who were responsible for 15% of American car sales in 2014. American-negotiated deals since NAFTA have involved less stringent rules.
Keen to keep the talks moving, the Canadian side at the sixth round suggested the “creative” solution of expanding the scope of regional content to include things like research and development. By drawing high-value-added investments to the region (and probably to America) that could entice good jobs. But Lighthizer rejected this gear shift as “the opposite of what we are trying to do”. He warned that by allowing new things to count towards the regional-content requirement, the old criteria could become less onerous, making it easier for Chinese exporters to suck away North American jobs. He later added that he was “always one to talk”. With such high-level disagreements remaining, progress towards sealing a deal this year is, in effect, parked.
This opinion article was prepared or accomplished by Oso Oseguera in his personal and individual capacity. The opinions expressed in this article are the author’s own and do not reflect the view or way of work of Chief Executive Officer Magazine.