Demands by the United States for higher levels of North American content in automobiles and 50 per cent U.S. content in vehicles made in Canada and Mexico are based on faulty data, Bank of Nova Scotia says in a study that bolsters the two countries' rejection of a key U.S. proposal.
The share of North American parts in vehicles assembled in Canada and Mexico has grown since 2011, an analysis done by the bank says, disputing U.S. assertions that its partners in the North American free-trade agreement provide a back door for lower-cost auto parts from China and elsewhere in Asia.
The study, issued Tuesday, provides new support for Canadian and Mexican negotiators, who have rejected outright the 85/50 demand on autos – that 85 per cent of the content of a North American vehicle come from within NAFTA and 50 per cent of the value of vehicles imported into the United States from Canada and Mexico have U.S. parts.
"The U.S. proposal to tighten NAFTA's rules of origin on vehicles is an ill-conceived solution in search of a problem. It would be an unnecessary restriction on the North American auto sector that would render it less competitive against its global peers," the study maintains. "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."
That comment echoes those made by auto makers, Canadian auto parts companies and negotiators from Canada during the fifth round of talks held last month in Mexico City.
Car companies and parts makers have urged the Trump administration to withdraw the demands, pointing out that North America needs a low-cost region within the trading bloc where parts with high-labour content can be manufactured.
That would keep the NAFTA bloc competitive with Asia and Europe, where auto makers benefit from the ability to source components and some vehicles from low-cost countries.
The bank estimates that North American content in vehicles assembled in Canada and Mexico has risen to 70 per cent and 74 per cent, respectively, since 2011.
That conclusion disputes a U.S. Commerce Department study that is believed to underpin the U.S. demands for higher content. That study argued that North American content declined since 2011, although it was based on data for the years before 2011 and Commerce Secretary Wilbur Ross declared there was no reason to believe that post-2011 numbers would show North American content rising.
"There is little evidence to support the U.S. view that NAFTA content in Canadian and Mexican-assembled vehicles is declining and that both countries are providing a so-called 'back door' for Asian content to enter North American value chains," the bank said.
The Bank of Nova Scotia numbers for Canadian and Mexican parts content show that vehicles assembled in the two countries are well above the current requirement that they must contain 62.5 per cent content from the three NAFTA countries to qualify for duty-free shipment within the trade zone.
About 80 per cent of vehicle parts sold in North America originate from one of the NAFTA countries, the bank said.
It estimates U.S. parts account for 50 per cent of the North American components market over all, hitting that number in Canada, 60 per cent in U.S.-assembled vehicles and 35 per cent in vehicles built in Mexico.
NAFTA content in U.S.-made vehicles is estimated to have declined to 65 per cent from 71 per cent. But that decline can be attributed to a successful U.S. policy that led to Asia and Europe-based auto makers investing billions of dollars in new assembly plants.
Offshore-based auto makers now account for 60 per cent of U.S. vehicle production, compared with 45 per cent in 2011.
Those companies may be using more parts from their home countries for design reasons, the report said.