By EARL ANTHONY WAYNE, former U.S. ambassador to Mexico
(The following article first appeared in the U.S. political website “The Hill” and is being republished in Pulse News Mexico with specific prior permission.)
U.S. House Speaker Paul Ryan (R-Wis.) said recently that he needed a proposed North American Free Trade Agreement (NAFTA) deal in the days ahead if the U.S. Congress is to vote on a new agreement this year. The prospects of meeting that timeframe are unclear.
Getting a NAFTA deal now would boost North America’s economies, but trade ministers and negotiators from Canada, Mexico and the United States remain divided on a series of tough issues. In mid-May, trade ministers left negotiating teams to continue work in Washington, while they remained on call. Canada’s Minister is back in Washington this week for talks.
At the center of recent talks has been rules for auto manufacturing under a new NAFTA. The so-called “rules of origin” (ROO) determine which autos can gain duty-free entry under a new agreement. The United States has proposed a complex system for which autos will be acceptable, and controversially seeks a minimum wage requirement for portions of the production process. Canada and Mexico have pushed back.
U.S. President Donald Trump made a direct pitch for increasing vehicle production in the United States to auto executives in mid-May. He sharply criticized the current NAFTA agreement and threatened new tariffs on imported cars. Last week, President Trump formally asked the Commerce Department to look at the possibility of imposing new tariffs on the import of autos citing danger to U.S. national security. This announcement generated a range of critical responses from Congress, the auto industry and trading partners, including Mexico and Canada. Canada and Mexico also face potential new U.S. tariffs on steel and aluminum exports to the United States under a previous U.S. action linked to national security.
Automakers are feeling squeezed. Potential U.S. tariffs on steel and aluminum would raise production costs. Trade clashes with China could limit access to a growing market. The U.S. attempts to shift production from Mexico and Canada to the United States could make them less competitive.
The U.S. administration is in essence trying to forge an “industrial policy” to reshape America’s auto sector via the NAFTA negotiations. The United States has reportedly proposed raising the regional content requirement for vehicles to 75 percent from the current 62.5 percent of a vehicle’s content. It suggested different weights for high-value auto parts and for steel and aluminum, for example. It has also proposed that 40 percent of light passenger vehicles and 45 percent of pickups must be built where wages are $16 an hour or higher. The United States suggested relatively short transition periods to implement these changes.
Mexico offered a counter proposal recently with lower percentages for regional content, longer transitions and apparently only a soft reference to wages, reflecting how the U.S. proposal would severely damage Mexican auto production.
The U.S. effort to include wage rates aims at Mexico’s lower hourly wages and is particularly controversial. It touches on sensitive questions:
What are fair wages in a country whose living costs are much lower than those of the United States?
Should the United States impose wage requirements, not just fair-market rules or practices, on a poorer country? Previously, the United States has focused on improving the rights of workers through trade agreements.
If the new U.S. proposals were to become part of the agreement, they would add much complexity to measuring if a car meets NAFTA standards for duty-free entry. It could also be a precedent for similar requests to cover other industries or from other countries to challenge U.S. wages.
It is very important to assess whether proposals that emerge will hurt or harm the U.S. auto industry, as well as understand the impact on other producers and costs for U.S. consumers.
An analysis by Scotiabank argues that the U.S. effort to tighten rules of origin is “an ill-conceived solution in search of a problem,” which could well make North America’s auto sector less competitive against global peers.
The study argues that U.S. content in auto exports from Mexico and Canada has already generally increased since 2011 and that the U.S. auto industry is doing well: U.S. exports to its NAFTA partners rose by 5 percent a year over the past decade, which is twice that rate of other manufacturing goods.
U.S. employment in the auto industry increased by an average of nearly 6 percent, year on year, since the 2008 crisis, which is more than five times the growth in overall manufacturing employment, Scotia argues.
The auto industry group, Driving American Jobs, adds that in 2016, automakers manufactured over 1 million vehicles more than the year before NAFTA went into effect and that the sector exported $137 billion in products to Mexico, Canada and the world.
A study of the U.S. ROO proposals by the Center for Automotive Research (CAR) argues that high content requirements and onerous reporting rules will make U.S.-made and brand vehicles less competitive. It finds that 25 to 87 percent of the vehicles currently sold in the United States might not be able to claim a NAFTA tariff preference.
This could raise costs from $470 to $2,200 per vehicle and result in 60,000 to 150,000 fewer vehicle sales annually and fewer U.S. exports, the study argues. CAR warns this would create incentives for producers to move manufacturing further offshore.
A proposed system for NAFTA’s auto rules of origin needs careful scrutiny:
- Will the complexity drive manufacturers to forgo the NAFTA benefit and pay a 2.5-percent tariff? Will it be workable to measure wage rates and content for all the companies in the supply chain?
- What gives us reason to believe that government officials know better than auto companies how to make cars more efficiently?
- Is the United States ready to accept others proposing a wage test for America? Could the European Union, for example, argue that wages are unfairly low in some U.S. states as part of a trade dispute with the United States?
- How much would the new rules raise the prices of vehicles? Would U.S. sales, production and employment decrease or increase? Would manufactures move production out of North America?
- What would the effect be on U.S. consumers?
- Is employment in the auto industry going to shrink because of new technology? How do the proposals help develop America’s workforce and industry for the future?
Many observers are questioning the use of national security as a rationale imposed tariffs on auto imports. Canadian Prime Minister Justin Trudeau called President Trump last Friday to express his “strong concerns” about the president’s proposed investigation regarding auto imports. In addition, the NAFTA talks themselves still need solutions to several other key areas of difference between the United States and its two neighbors, including on the so-called “sunset clause,” which could make it easier to end the treaty, mechanisms for settlement of any disputes that arise, and rules for bidding on government procurement opportunities, among other issues.
It is important to recall that NAFTA supports 14 million U.S. jobs. Modernizing the agreement to include best practices and areas like the digital economy is widely supported. The cry from U.S. businesses and farmers, however, has been to do no harm.
Ending NAFTA would be a serious economic blow. Studies forecast losses of millions of jobs and well over $100 billion in GDP decline. A new study by AT Kearney found NAFTA withdrawal would cost U.S. consumers $5.3 billion a year.
Businesses, workers and farmers linked by NAFTA with America’s two largest clients, Canada and Mexico, will suffer from continued uncertainty if negotiators miss this opportunity to agree.
If no agreement is reached at this time, the negotiations could be delayed until 2019, after Mexico’s new president takes office. It is not clear what positions that Mexican president may take, given the growing frustration in Mexico with the United States.
The best option is a good NAFTA agreement now. This moment requires careful scrutiny of the measures being debated and clear messages from NAFTA’s many stakeholders about the heavy costs if North America misses this opportunity.
Earl Anthony Wayne is a public policy fellow at the Woodrow Wilson Center and career ambassador (ret) from the U.S. Diplomatic Service, where he served as U.S. ambassador to both Mexico and Argentina, as well as assistant secretary of State for economic and business affairs.