One of the most contentious demands made so far by the Trump administration in the renegotiation of the North American Free Trade Agreement concerning the deal’s automotive rules of origin is “an ill-conceived solution in search of a problem,” according to Scotiabank economists that studied the issue in a new paper published this week.
Noting that Washington’s proposal that 85% of the content of North American vehicles must originate from within NAFTA and for at least 50% U.S. content in vehicles made in Canada and Mexico is likely to be a “flash point” in the next round of talks set for late January in Montreal, the report’s authors set out to examine the data underpinning the Trump administration’s assertions that its NAFTA partners are effectively providing a “back door” for lower-cost auto parts from China and elsewhere in Asia.
Countering the Trump administration’s notions about NAFTA’s “job killing” rules of origin, based on a review of the existing evidence, the Scotiabank economists found that the local content shares in Canadian- and Mexican-assembled autos are: 1) higher than estimates utilized by the Department of Commerce; 2) on par with local content shares in U.S.-assembled vehicles; and 3) broadly increasing when, on average, these local content shares are at the same time falling in U.S.-assembled vehicles.
“There is little evidence to support the U.S. view that NAFTA content in Canadian- and Mexican-assembled automobiles is declining and that both countries are providing a so-called ‘back door’ for Asian content to enter North American value chains,” the paper states. In fact, the U.S. government’s own data, according to the Scotiabank economists, show that U.S. and NAFTA content shares have, since 2011, generally increased in vehicles assembled in Canada and Mexico.
“Ironically,” the report adds, the data “imply that local content shares in U.S.-assembled vehicles have, on average, fallen over the same periods that these shares have trended upward in both Canada and Mexico. Moreover, we review a set of papers that find higher local content shares in Canadian- and Mexican-assembled manufactured goods and autos than in estimates presented in a recent cornerstone study” by the Commerce Department that has been cited by Secretary Wilbur Ross to back his call for the renegotiation to “meaningfully shift the trade imbalance.”
The American Automotive Policy Council, a leading industry group representing the ‘Big Three’ U.S. automakers, has also pushed back against that study, which has been widely criticized by economists for using outdated OECD figures that happened to coincide with a 50% downturn in production during the midst of the U.S. economy’s recovery from the Great Recession and for overlooking a number of key metrics suggesting that NAFTA has actually made U.S. automobile companies become more globally competitive since 2000.
“Rather than helping the U.S. auto industry, tighter NAFTA rules of origin on autos would likely make the sector more inflexible and less competitive,” the Scotiabank report concludes, arguing that “the Canadian and Mexican negotiating teams are right to seek alternatives to this U.S. ‘poison pill’ to get past this negotiation ’redline’ for their countries.”
In related news, the industry publication Inside U.S. Trade is reporting (paywall) that the “Office of the U.S. Trade Representative advanced its NAFTA automotive rule-of-origin proposal without first gathering underlying data to support it.”
According to sources, the USTR “said it developed the proposal hoping U.S. companies would provide the information needed to inform its approach in future negotiating rounds.” However, faced with “the U.S. industry’s reluctance to engage in a conversation about changes to the existing rule of origin altogether,” the USTR was prevented from following through with its initial strategy to seek the assistance of American automakers to help flesh out its approach.
U.S. officials have repeatedly stated that the auto proposal, as well as others USTR has put forward in the NAFTA talks, were the starting points for negotiation and could be modified once Canada and Mexico engage and present counteroffers. Both Canada and Mexico, as well as the auto industries in all three countries, oppose the premise of USTR’s proposal and therefore, have so far refused to legitimize it with a counter-offer.
Inside U.S. Trade reports a source familiar with the proposal saying that rather than being a “maximalist” position without any flexibility, the administration designed it to be the “start of a process of figuring out the right approach and numbers,” but added that to date “no one will engage and USTR can’t do it alone.”