NAFTA renegotiation talks make automakers, aftermarket nervous

March 13, 2018
Industry estimates say abandoning NAFTA and reverting to World Trade Organization tariff levels would cost the auto industry $10 billion per year and the loss of 50,000 U.S. auto parts jobs.

The U.S. automotive industry is watching the ongoing renegotiation talks between the U.S., Mexico and Canada over the North American Free Trade Agreement (NAFTA) with trepidation. President Donald Trump made reforming or abandoning the 24-year-old agreement a key part of his presidential campaign, and the administration’s demands of its trading partners could very well sink the agreement.

Industry groups estimate that abandoning NAFTA and reverting to World Trade Organization tariff levels would cost the auto industry $10 billion per year and the loss of 50,000 U.S. auto parts jobs.

Talks stalled after the most recent round of talks in Montreal, in part because of the U.S. requirement that the North American (and United States) content of cars be raised substantially. The looming presidential election in Mexico on July 1 could further complicate negotiations.

The Trump administration wants the requirement for the value content of automobiles sourced from NAFTA countries to rise to 85 percent (up from 62.5 percent) for tariff-free trade, and that 50 percent of every vehicle produced in the region must come from the United States. U.S. parts content currently averages 30 percent.

Both Canada and Mexico have rejected the 50 percent content requirement, and automakers have balked at what would represent a costly and unprofitable restructuring of their entire supply chains.

“We’d argue the current [rules of origin] work,” says Matthew Blunt, president of the American Automotive Policy Council (AAPC) and former governor of Missouri. “The 62.5 percent regional value content requirements are the highest of anywhere in the world, and struck the right balance. What the administration proposed is not just difficult, but impossible to comply with. There is not a single product built anywhere in North America today that would meet the requirements of the U.S. proposal. It would drive investment outside the U.S., and actually achieve the opposite of what the administration is trying to do.”

According to the Center for Automotive Research (CAR), U.S. auto sales could decline by 450,000 vehicles if NAFTA goes away and the 35 percent tariff the president has suggested were imposed. Boston Consulting Group and the Motor & Equipment Manufacturers Association (MEMA) estimate the U.S. auto parts industry could lose 50,000 jobs.

NAFTA has been characterized as a “job killer” by critics almost since its inception, and the Trump administration’s position on U.S. content in automobiles is targeted at increasing production and jobs in the United States.

Automakers, however, think the current agreement simply needs tweaked, and have pointed out that it would be impossible to meet the proposed content requirements given the current state of the automotive supply chain.

A research report commissioned by the MEMA and conducted by Boston Consulting Group (BCG) indicates that radical changes or a withdrawal from the agreement could negatively affect both the industry and the economy.

The study found that U.S. tariffs in the range of 20 percent to 35 percent would add $16 billion to $27 billion to automotive costs, and an increase in per-vehicle production costs of as much as $1,100. This could put U.S. automakers at a competitive disadvantage with European and Asian car companies.

“NAFTA has been good for the motor vehicle supplier industry and for American jobs,” said MEMA President and CEO Steve Handschuh. “We have seen a 19 percent growth in U.S. employment over the last four years, and we would like to see that continue with the support of an open market and robust supply chain. Efforts to bring jobs back to the U.S. are commendable, but we have to acknowledge that our plants are at or near capacity and that many manufacturers are already having a hard time filling jobs and maintaining a qualified workforce. We support the President’s Executive Order to add more apprenticeships. Suppliers need streamlined administrative processes, flexibility in the types of apprenticeship programs, and the ability to add more apprenticeship programs for broader occupations beyond the traditional programs. These are critical steps in keeping American businesses competitive in a global marketplace."

Attempts to reshore U.S. automotive manufacturing capacity face additional obstacles. The market for vehicles has peaked, and are likely to decline over the long term. OEMs and suppliers would have little incentive to expand capacity, and it would little sense to spend the money to build new factories given the minimal per-part cost savings of avoiding punitive tariffs.

In Montreal, the Canadians proposed a compromise on auto content that the U.S trade representative Robert Lighthizer dismissed as “vague.” The Canadian proposal would alter the rules of origin content requirements to include the sale of software, engineering and other work.

If the content demands are set too high, manufacturers could simply pay the 2.5 percent U.S. tariffs on parts and passenger cars produced in other regions, which would actually reduce production on the continent.

“They would pay the tariff, which would be an annual tax on the industry,” the AAPC’s Blunt says. “It would undermine global competitiveness. If they decide to pay the tariff and don’t worry about sourcing, it would perhaps drive automakers to use more Asian components than they do today, which would be extremely counterproductive to achieving the goals of the administration.”

Blunt says the Canadian proposal was encouraging. “In the previous rounds, the U.S. presented a proposal and the other countries didn’t respond,” Blunt says. “So for the first time, one of the other countries stepped up with ideas to meet the U.S. demands on rules of origin. We’re encouraged that there is a discussion at this point, and hopeful that there will be constructive engagement.”

The Trump administration has been under pressure from Republican lawmakers who support NAFTA as well. Thirty-five Republican senators sent a letter to the president explaining the benefits of the trade deal.

“NAFTA supports 14 million jobs, representing thousands of jobs in each of the 50 states,” the senators stated in the letter. "Despite all of its benefits, however, we can do better and there are opportunities to improve the agreement. Modernizing NAFTA to increase market access, expand energy exports to maximize domestic energy production and including provisions on intellectual property and e-commerce will make this agreement even more beneficial to the United States.”

Since its inception in 1994, the affect NAFTA has had on the U.S. economy has been mixed. The trade deficit in goods between the U.S. and its neighbors rose from $2 billion in 1994 to nearly $74 billion now. That still only accounts for roughly 10 percent of the country’s total global trade deficit; if you consider both goods and services, the U.S. actually has a trade surplus with Canada.

During the same period, the U.S. lost hundreds of thousands of high-paying manufacturing jobs, although some of that job loss was also due to competition from China as well as an increase in automation.

NAFTA supporters point out that job losses due to plant closings after NAFTA were very similar to rates prior to the agreement, and that U.S. industrial production increased 49 percent from 1993 to 2005.  In fact, the sharpest decline in manufacturing employment occurred in the U.S. immediately after China joined the World Trade Organization in 2001, not after NAFTA’s passage.

Canadian Prime Minster Justin Trudeau has threatened to walk away from the agreement rather than take a bad deal, and Canada’s chief negotiator criticized U.S. inflexibility in the negotiations. Trudeau received support from Texas Republican lawmaker Pete Sessions, who chairs the House Rules Committee.

Mexico’s Foreign Minister Luis Videgaray, meanwhile, said in a press conference that his country “should be prepared for a future with or without NAFTA.”

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