[This is part of an ongoing series entitled “Modernizing NAFTA,” which examines the importance of modernizing the North American Free Trade Agreement (NAFTA) and it's critical impact on jobs, economic prosperity, and trade. Stay tuned as negociations unfold.]
Last week, trade negotiators from Canada, Mexico, and the United States wrapped up the first round of negotiations to modernize the North American Free Trade Agreement (NAFTA). Negotiators met over the course of the five-day round to discuss 18 of the agreement’s potentially 30 chapters, but public focus centered on the opening remarks delivered by U.S. Trade Representative Robert Lighthizer:
This is an historic day for the United States. Today, for the first time, we will start negotiating to revise a major free trade agreement. American politicians have been promising to renegotiate NAFTA for years, but today President Trump is going to fulfill those promises.
During the public forum, Amb. Lighthizer reaffirmed President Trump’s view that the NAFTA “needs major improvement,” and he stressed one issue in particular, saying, “Rules of origin, particularly on autos and auto parts, must require higher NAFTA content and substantial U.S. content.”
What does this mean, exactly? As negotiated, the current NAFTA mandates stringent rules of origin on products that seek to qualify for duty-free access into North American markets. For example, in the automotive sector, 62.5 percent of a car or truck must be produced in North America to qualify for duty-free treatment.
The U.S. administration is aiming to increase this percentage in an attempt to drive further production to North America.
Mexico and Canada have reservations about this approach. Amb. Lighthizer’s Mexican counterpart, Secretary Ildefonso Guajardo, indicated,
It’s not good for American companies, it’s not good for Mexican companies. So I think that we should find other policy tools to really incentivize investment in our countries.
Minister Chrystia Freeland of Canada added,
We’re also very aware of the extreme complexity of rules of origin, and it’s going to be very important from the Canadian perspective to take very great care in any changes which are made to ensure they don’t disrupt supply chains. It’s a conversation we go into with goodwill and real interest in.
Indeed, as the Wall Street Journal editorialized this week, changes to the NAFTA’s rules of origin chapter could adversely impact North American competitiveness.
NAFTA’s rules of origin are currently the highest of any of the world’s free trade agreements, and even a modest increase may lead companies to reduce North American content as they opt to simply pay lower tariffs set forth by the World Trade Organization instead.
As the American Automotive Policy Council outlined in their submission to the USTR on the modernization of NAFTA, tighter rules of origin could:
1. Stunt Export Growth: “As costs increase for U.S. automakers through less efficient source, those costs will be passed on to consumers. Foreign manufacturers located outside of the NAFTA region will not see their costs rise in the same fashion as U.S. automakers. This will give foreign automakers the competitive edge.”
2. Challenge Producers to Meet Standards & Preferences: “Meeting different foreign auto standards and preferences, which deviate from the typical NAFTA market configuration, can be very expensive, especially for low volume exports. Meeting these needs may require auto parts made only in markets outside the NAFTA region (i.e. small diesel engines and manual transmissions for EU markets). Access to the most cost-competitive inputs to meet the unique and different requirements and consumer preferences from outside the NAFTA region helps keep the U.S. competitive in foreign markets.”
3. Increase imports: “If a higher… (percentage) increases the cost of domestic automakers by a level greater than the U.S. import tariff, auto imports would then be provided a comparative advantage, thus incentivizing imports over domestically built cars.”
Each of these outcomes could jeopardize investment, job creation, production, and economic competitiveness in North America– but there are steps negotiators could take to avoid those upshots.
First, the negotiators should focus on simplifying the NAFTA’s rules of origin, which are often too complex for the global supply chains that are essential to production. Officials from the three countries should consider whether steps can be taken to ease the administrative burden of rules-of-origin compliance.
Second, a modernized NAFTA should encourage more effective regulatory cooperation on future standards to avoid unnecessary divergence. Regulatory streamlining across the region will further facilitate trade and reduce unnecessary costs and administrative burdens.
Finally, negotiators should take care to ensure that our manufacturers are able to move data freely across borders to enable them to compete fairly to serve customers in North America and around the world.
As the Chamber has said before, we strongly believe the modernization of the NAFTA is a reasonable and achievable goal. However, ideas like raising the percentage in the rules of origin chapter is one reason companies regard these negotiations with trepidation that the outcome could endanger the rules that have made North America the most competitive place in the world.
Read the first in the series, "Growth and Opportunity for North America"