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US victory in NAFTA rules fight could be a loss for the nation's auto industry

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US victory in NAFTA rules fight could be a loss for the nation's auto industry

The insistence of U.S. negotiators working on an overhaul of the North American Free Trade Agreement that a new pact include changes to rules of origin for the automotive sector has flared into an acrimonious point of contention that could derail the talks, add complexity and costs to domestic carmakers' supply chains, and strengthen overseas rivals.

"NAFTA has allowed the U.S. auto industry to stay globally competitive, thanks to integrated networks that manufacturers have built across North America – for example, in some cases components and systems can cross borders six or seven times before going into the finished vehicles assembled in the U.S. for American customers," said Wade Newton, spokesman for the Alliance of Automobile Manufacturers, which represents 70% of all car and light truck sales in the U.S.

No NAFTA would mean that Mexico and Canada will be more competitive in more markets, Newton said, pointing to Mexico's free trade agreements with 45 countries, which gives it duty-free access to 47% of the global new-car market. That is compared to the 20 agreements to which the U.S. is a party, which allow access to 9% of that market, he noted.

And if NAFTA were not in place, the resulting tariffs on all sides would lead to a slowdown in U.S. manufacturer's ability to staff up – exactly the result that the U.S. is trying to avoid.

SNL Image
U.S. Trade Representative Robert Lighthizer, center, is insisting on new rules of origin for the auto industry. He briefed reporters with Canadian Foreign Minister Chrystia Freeland, left, and Mexico's Secretary of Economy Ildefonso Guajardo Villarrea, right, after the latest round of NAFTA talks. Source: Associated Press

U.S. Trade Representative Robert Lighthizer said in a press conference Oct. 17 following the most recent negotiating round that the U.S. had not done any analysis of the specific effects of a withdrawal from NAFTA. Instead, Lighthizer said he is still focused on amending the current deal despite obvious hurdles.

Tariff face-off

Much of the impact of undoing NAFTA is a function of how interwoven the industry has become among the three countries, especially when it comes to car parts.

Many of the components for the 11.9 million vehicles made in the U.S. last year by 13 different companies cross back and forth across NAFTA-party borders multiple times before going into finished vehicles assembled in the U.S., Newton said. Now, they do that duty free.

"Once [Canada and Mexico] lose their tariff preference on the final automobile, the attractiveness of U.S. auto parts becomes correspondingly less," said Peter Minor, trade economist and founder of ImpactEcon.

In addition, Canada and Mexico, which are continuing to negotiate the Trans-Pacific Partnership trade agreement that the U.S. pulled out of this year, could eventually turn to Asia where the U.S. will no longer have preference, he noted. And reciprocal tariffs imposed by Canada and Mexico that are likely required by the World Trade Organization will also have an impact on jobs, Minor said.

The trade-weighted average that the U.S. could apply to its automotive sector is 1.3% for Canada and 3.5% for Mexico, ImpactEcon calculated in a recent report. The trade-weighted average takes into account trucks and other kinds of vehicular equipment, as well as cars. Canada's and Mexico's reciprocal tariffs would be 4.5% and 12.9%, respectively. The result across all sectors, including the auto industry, would be almost 188,000 U.S. jobs lost, the report said.

The original equipment manufacturers might very well bite the bullet and pay the tariff for parts that are now manufactured in Mexico, said Aakash Arora, principal with Boston Consulting Group.

"Manufacturing imprints are not easy to move," he noted. "In the short term, supply chains are inflexible unless tariffs are so prohibitive that you have to move."

Job loss would mostly stem from the fact that the manufacturers of finished vehicles would pass along costs to consumers to protect their margins. That would mean car buyers would not purchase vehicles with additional components, which could mean about a 6% loss in that content in the finished automobile, according to a Boston Consulting Group research report prepared for a recent Motor & Equipment Manufacturers Association presentation.

Extrapolating from that would mean that between 25,000 and 50,000 U.S. jobs could be lost in the auto parts industry alone, the report estimated.

Trump and the Big Three

The U.S. automotive industry historically accounts for 3% to 3.5% of U.S. GDP, according to the Department of Commerce. As of August, the industry, including parts makers, employed about 940,000 workers in the U.S., according to Department of Labor data.

Since the recession, U.S. automotive jobs have increased 6%, according to a Boston Consulting Group report. That is in line with a 7% increase in jobs for NAFTA nations during the same period, the report said.

After meeting with the leaders of the "Detroit Three" – General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV – in March, President Donald Trump proclaimed that the "assault on the American auto industry is over."

"We're going to bring a lot of jobs back to Michigan and Ohio and Pennsylvania," he said.

One way the current administration believes it can restore those jobs is by insisting that automotive goods produced under the new NAFTA agreement contain content that is 50% manufactured solely in the U.S. in order to remain duty free. The current NAFTA agreement requires that at least 62.5% be manufactured by all parties to the agreement.

Lighthizer said he was "disappointed" in Canada's and Mexico's resistance to America's demands during an Oct. 17 trilateral press conference that concluded the latest talks. He reiterated claims made by President Donald Trump that NAFTA had cost the U.S. "tens of thousands of manufacturing jobs."

That demand was characterized by Canadian Foreign Affairs Minister Chrystia Freeland as a "winner-takes-all mindset" that would result in the loss of tens of thousands of jobs in the North American auto industry. Mexico's Economic Secretary Ildefonso Guajardo Villarreal was not as specific in his response to U.S. demands, though he said there were certain issues on which his country was not willing to concede.

A U.S. Trade Representative spokesperson declined to supply data supporting Lighthizer's contentions.

The next round of talks is scheduled for mid-November in Mexico City, after a longer "intercessional" period for the negotiators to "assess all proposals," Lighthizer said. Though there had been pressure to complete the new NAFTA this year, he said additional negotiating sessions would be scheduled for the first quarter of 2018.

It also gives the U.S. automotive industry time to assess the further impact of leaving the agreement.

Evan Fallor contributed to this report.