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Proposed NAFTA replacement could change sourcing rules for North American auto parts

Monday, February 25, 2019 - 08:00
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William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS), a “think tank” based in Washington, D.C. CSIS was established in 1962 by David M. Abshire and Admiral Arleigh Burke and it is described as “a bipartisan, nonprofit policy research organization dedicated to providing strategic insights and policy solutions to help decision-makers chart a course toward a better world.”

Reinsch previously served for 15 years as president of the National Foreign Trade Council, where he led efforts in favor of open markets in support of the Export-Import Bank and the Overseas Private Investment Corp. From 2001 to 2016 he concurrently served as a member of the U.S.-China Economic and Security Review Commission. He is also an adjunct assistant professor at the University of Maryland School of Public Policy, teaching courses in globalization, trade policy and politics.

Reinsch also served as the under-Secretary of Commerce for export administration during the Clinton Administration. Prior to that, he spent 20 years on Capitol Hill, most of them as senior legislative assistant to the late Senator John Heinz (R-PA) and subsequently to Senator John D. Rockefeller IV (D-WV). He holds a B.A. and an M.A. in international relations from Johns Hopkins University and the Johns Hopkins School of Advanced International Studies.

Edited slightly for context and clarity, Reinsch and CSIS have prepared a series of questions and answers related to the details of the pending U.S.-Mexico-Canada Agreement (USMCA) and other North American trade issues:

Q: What are some the most significant changes in USMCA compared to the North American Free Trade Agreement (NAFTA)?

A: The following areas will see the largest changes from USMCA:

  • Automotive rules of origin: USMCA will require that 75 percent of auto content be made in North America in order for automobiles to qualify for preferential, duty-free treatment. By comparison, NAFTA’s auto rule of origin was 62.5 percent. Of the 75 percent content threshold required by USMCA, 40-45 percent must be made by workers that earn at least $16 an hour.
  • The wage requirement will be phased in over five years. It is essentially a U.S. or Canada content requirement as wages for Mexican autoworkers are not close to that level. The Trump Administration may have traded some additional auto manufacturing jobs in the United States for higher car prices and a less globally competitive auto industry. The higher rule of origin in USMCA and wage requirement may disrupt existing supply chains designed around the NAFTA rule of origin. USMCA rules may constrain where automakers can source certain parts, which could boost manufacturing costs.
  • Investor-state dispute settlement: The special arbitration mechanism contained in NAFTA that allowed investors to sue NAFTA countries for discriminatory actions will be phased out between the United States and Canada, and its coverage will be significantly trimmed for investors in Mexico. The investor-state dispute settlement provision (ISDS) of USMCA will cover investments in Mexico only in oil and gas, power generation services, telecommunication services, transportation services, and the management of ownership of infrastructure. The paring back of ISDS is a major win for U.S. Trade Representative Robert Lighthizer, who views it as a means for corporations to undercut country’s sovereignty and as political risk insurance that encourages outsourcing.
  • Digital trade: USMCA contains provisions on digital trade similar to those negotiated in TPP (the Trans-Pacific Partnership). One significant improvement from TPP is a blanket ban on data localization requirements that does not provide an exception for financial services firms.
  • De Minimis: USMCA will raise the threshold at which imports from Canada and Mexico will be subject to customs duties, a priority for many in the U.S. business community. For Canada, the de minimislevel will be raised from C$20 to C$40 for taxes and allow duty-free shipments of up to C$150, from C$20. Mexico will allow duty-free shipments of up to $117, from $50. The U.S. de minimisthreshold is $800.
  • Sunset: USMCA contains a renewable 16-year term, a huge improvement for Canada and Mexico over the five-year sunset clause originally pushed by the Trump Administration. The three countries will meet six years after the agreement comes into force to decide whether to renew the pact for another 16 years.
  • Currency: For the first time, the United States has managed to include rules regarding currency manipulation and monetary policy in the core text of a trade agreement. Requirements related to transparency in foreign exchange activity will be subject to USMCA’s state-to-state dispute settlement mechanism.

Q: How likely is it that Congress passes legislation to implement USMCA?

A: USMCA certainly isn’t dead on arrival on Capitol Hill. Thus far, Republican lawmakers have voiced tepid support for the agreement while some key Democrats have remained neutral and stopped short of opposing USMCA outright.

President Trump has conceded that he is “not at all confident” about his trade pact’s fate in Congress and added that “anything you submit to Congress is trouble.” Republicans are likely to throw their weight behind President Trump’s first signature trade win despite some aspects of the deal introducing managed trade that run counter to the traditional Republican embrace of free trade.

While some Democrats could be pleased with the USMCA rules on investor-state dispute settlement, auto rules of origin, and even maybe labor, it will be a tough ask for them to support what could be a legacy item for a president that is deeply unpopular with the Democratic Party.

Q: What happens to the Section 232 national security tariffs on steel and aluminum from Canada and Mexico? What about potential Section 232 tariffs on automobiles?

A: The steel and aluminum tariffs were not resolved as part of the USMCA deal, although Canada and Mexico were granted some protection from potential tariffs on autos and auto parts. Talks on the steel and aluminum tariffs are expected to begin now that USMCA has been completed.

If the United States imposes Section 232 national security tariffs on autos and parts, 2.6 million passenger vehicles and $32.4 billion of auto parts from Canada will be exempt from the duties. For Mexico, 2.6 million passenger vehicles will also be exempt, as well as $108 billion worth of auto parts.

Q: Trump delivered his second State of the Union address on Feb. 5; what was said about trade?

A: President Trump mourned the United States’ “decades of calamitous trade policies” that allowed countries like China and deals like NAFTA to “take advantage of us;” he explained that with his presidency comes a new era of trade policies that will no longer permit other countries to steal U.S. jobs and wealth.

In China’s case, that involves intellectual property theft and the specific “targeting” of U.S. industries. The tariffs imposed on Chinese goods, he argued, raise billions of dollars for the government (though in actuality tariff revenue has only raised $6 billion, compared to the $12 billion government bailout to farmers due to tariff retaliation). He discussed the ongoing trade negotiations with China, saying that the solution must include “real, structural change” that will prioritize U.S. jobs and focus on balancing the U.S. trade deficit.

In the case of NAFTA, Trump applauded the formation of the new USMCA and urged Congress to ratify it. With the objective of creating more goods that are “Made in the USA,” Trump explained that the USMCA and a better trade agreement with China would create more jobs and protect intellectual property. As well as asking Congress to ratify the USMCA, President Trump urged the passage of the United States Reciprocal Trade Act, which gives the executive branch power to impose reciprocal tariffs.

The official response to the State of the Union, given by former Georgia gubernatorial candidate Stacey Abrams, only mentioned trade once, saying “we owe more to the millions of everyday folks who keep our economy running, like the . . . farmers caught in a trade war.” The Spanish-language response, delivered by California State attorney general Xavier Becerra, did not mention trade.

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