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Politics Canada warns U.S. that NAFTA auto changes would backfire on America

A worker performs final inspections on a vehicle at the Nissan Motor Co. manufacturing facility in Smyrna, Tenn., in October.

Luke Sharrett/Bloomberg

The Canadian government used NAFTA talks on Tuesday to warn the Trump administration that Washington's bid to rewrite the deal's automotive section in favour of the United States would backfire and cost Americans jobs and profits.

In Mexico City, where the fifth round of North America free-trade agreement negotiations wrapped up on Tuesday, the Canadian team made a presentation outlining how destructive and self-defeating it believes the rules-of-origin proposals would be.

Sources familiar with the talks outlined the conversation taking place behind closed doors.

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The Canadians cautioned their U.S. counterparts that the Detroit Three auto makers – General Motors, Ford and Fiat Chrysler – would suffer the most damage if these American demands were adopted, sources familiar with the negotiations said. This is because the changes would drive up the cost of making vehicles in the United States.

Canada told the Americans it estimated the United States would lose 21,000 jobs as the increased costs of manufacturing reduced exports outside the NAFTA zone by 1.4 million autos a year – equivalent to the annual output of five or six plants.

The Canadian presentation said these proposals would ultimately encourage automotive interests to move manufacturing outside North America and end up benefiting offshore auto makers – including those in South Korea, Europe and Japan – which would build vehicles abroad and then pay tariffs to sell into the U.S., Canadian and Mexican markets.

Last month, U.S. negotiators laid down stringent demands for the automotive portion of a new NAFTA – proposals that have since been opposed by auto makers and parts suppliers and rejected by Canada and Mexico as unworkable.

Washington said it wants to rewrite the deal so that vehicles manufactured in North American could only qualify for duty-free access to the American market if they contain at least 50-per-cent U.S. content and 85-per-cent North American content.

Foreign Affairs Minister Chrystia Freeland said the Trudeau government is pushing for Washington to address the likelihood, supported by fact-based research, that the auto rule changes would have the opposite effect of what the U.S. intends.

"We have heard from the auto sector – not only in Canada but also in the United States – that some of the proposals … would not only be harmful for Canada but would be harmful for the U.S. as well," she told reporters in Ottawa on Tuesday.

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Ms. Freeland said it's now up to the Americans to address the data presented by Canada. "Do you agree with our facts or do you disagree with our facts? … These are facts we've gained from working very hard with industry on both sides of the border. It's that fact-based approach that we've really been pushing."

Sources familiar with the NAFTA negotiations said the Canadians prefaced their presentation in Mexico City by noting how healthy the U.S. auto sector appears today.

The Canadians observed that employment has climbed about 6 per cent on a year-over-year basis during the last decade, and that investment in U.S. auto plants totalled $9.5-billion (U.S.) in 2017, creating or retaining more than 12,000 jobs. In 2016, the auto sector invested $8-billion in U.S. plants and $20-billion in research and development.

Their message? This is not an industry that is facing hard times, but instead one where production, employment and research has been climbing.

The U.S. proposal to boost the minimum required American content and minimum North American content would amount to heavy-handed intervention in what appears to be a healthy private sector, the Canadians told the Americans.

The more stringent auto-content rules would amount to dictating where suppliers should be located and represent an interference in decisions currently made by private investment, making geographical location the leading factor to consider when picking sources for parts, the Canadians said.

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This would force companies to break existing supply chains and replace them with parts that otherwise wouldn't be top choices when factors such as cost, quality and innovation are weighed.

The strict content rules urged by the Americans could also result in a situation where auto parts that move back and forth across the Canada-U.S. border during manufacturing would be hit with levies several times, boosting their ultimate price tag, the Canadian team warned.

One potential outcome would be that auto makers lose money on their operations in Canada and Mexico or shift them to the United States, which would require tens of billions of dollars in additional capital spending. That would result in the the cost of vehicles rising in the United States as the companies seek to recoup losses or the costs of shifting production, one source said.

These rising costs would dampen vehicle production in the United States and represent a boon for offshore suppliers such as South Korea, which already has preferential access to the United States and Canadian markets through free-trade deals.

One senior Canadian industry official said the U.S. positions on the three-party trade deal are so unreasonable that his thoughts are already turning to whether Canada can negotiate a return to the Canada-U.S. free trade agreement or a new bilateral deal.

Flavio Volpe, president of the Auto Parts Manufacturers' Association, said U.S. trade officials were complaining in Mexico City earlier this week that Canada was not offering a counterproposal to the automotive demands the Americans placed on the table last month. The Americans had characterized that demand as " 'take it or leave it' and it was an extreme position," Mr. Volpe said.

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The sixth of NAFTA negotiations will take place Jan. 23-28, 2018, in Montreal.

Ms. Freeland repeated Tuesday that Canada is developing contingency plans should NAFTA talks fail. U.S. President Donald Trump has threatened to tear up the deal if he can't get it rewritten to tilt the agreement more in favour of U.S. workers.

"Our approach is to hope for the best and prepare for the worst and Canada certainly is prepared for every eventuality," Ms. Freeland said.

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