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U.S. NAFTA demands on auto rules of origin could backfire, experts say

The Magna plant in Puebla, Mexico on Wednesday, January 22, 2015.

Brett Gundlock/Boreal Collective/The Globe and Mail

U.S. demands that a new NAFTA deal include stronger rules of origin and a minimum amount of U.S. content in North America-built vehicles could backfire on the United States, auto industry officials and trade experts say.

U.S. representatives kicked off negotiations on a new North American free-trade agreement Wednesday by making those auto industry proposals front and centre and pointing a finger at Mexico and the $68-billion (U.S.) surplus in automotive products that country is running with the United States.

But changing rules of origin so the requirement for North American content in vehicles exceeds the current level of 62.5 per cent and insisting on a set percentage of U.S. content could cause auto makers and parts companies to shift production outside NAFTA.

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That would be the opposite effect of what the Trump administration is seeking in the NAFTA talks, which is to repatriate jobs that it believes have flooded out of the United States to Mexico, or at least divert any new automotive production away from its southern neighbour and to the United States instead.

What auto makers and parts suppliers could do is decide not to comply with rules that allow them to ship duty-free within NAFTA and instead subject themselves to the 2.5-per-cent tariff the United States levies on vehicles and parts imported from non-NAFTA countries.

"Changing rules of origin in a way that raises costs by 2.5 per cent or more could prompt auto makers to simply ignore the NAFTA market-access provisions, pay the 2.5-per-cent tariff and scrap the costly rules of origin documentation," said Dan Ciuriak, a former chief economist with the Department of Foreign Affairs and International Trade, who now heads Ciuriak Consulting Inc.

Auto companies could shift production to China and supply the U.S. market from there, Mr. Ciuriak said, as Ford Motor Co. will do with its Focus compact car after the Trump administration criticized the company for planning to build a new assembly plant in Mexico that would export Focus models to the United States.

If auto producers source their parts from offshore suppliers, that would cause cuts in assembly and parts jobs in the United States, Sandy Moroz, lead negotiator for Canada on rules of origin in the original NAFTA talks, said in a commentary for Policy Options.

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"It backfires on the U.S.," said David Worts, executive director of the Japan Automobile Manufacturers Association of Canada. "If you're paying the [2.5-per-cent] tariff, you don't have to meet any rule."

Foreign Affairs Minister Chrystia Freeland quickly rejected the idea of national content, but appeared more flexible on rules of origin.

"It's going to be very important from the Canadian perspective to take very great care in any changes which are made to ensure they don't disrupt supply chains," Ms. Freeland told reporters in Washington on Wednesday after the first day of talks.

Comments on rules of origin and U.S. content in vehicles made Wednesday by U.S. Trade Representative Robert Lighthizer represented a major shift for Canadian negotiators, who had not been led to expect this demand from previous U.S. statements on NAFTA talks.

U.S. officials gave little indication before this week that they would demand U.S.-specific auto content rules.

In negotiating objectives released last month, the U.S. government repeatedly talked about ensuring that local-content rules help both the United States and North America, rather than merely aiding U.S. manufacturers.

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The U.S. proposals run counter to the theme it has been hearing from the auto industry: do no harm.

In almost a quarter-century since NAFTA came into force in 1993, the industry has restructured itself along continental lines. Vehicles and components are manufactured in each of the three countries and cross borders duty-free and relatively seamlessly – in some cases, several times.

Parts that are labour-intensive, such as seat fabrics and wire harnesses, are made mainly in Mexico, where wages are about 10 per cent of the level they are in Canada and the United States.

"Forcing large-scale restructuring on the auto industry will involve significant costs for the producers and eventually consumers," Mr. Ciuriak said.

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