NOVEMBER 29, 2018 – Globe and Mail

The Trump administration is pressing Mexican officials to give the United States the power to selectively punish automakers with plants in Mexico by making some companies subject to tariffs while exempting others, The Globe and Mail has learned.

Industry sources in both countries with knowledge of the discussions said the United States wants the right to choose how much production by a specific company would be shielded from potential future tariffs under the terms of a side letter to the United States-Mexico-Canada Agreement.

The letter exempts 2.6 million Mexican-made vehicles and US$108-billion worth of auto parts annually from 25-per-cent tariffs that U.S. President Donald Trump is considering imposing under section 232 of the Trade Expansion Act. But the text does not spell out how exactly the quota – which is higher than current exports – would be implemented.

Giving the United States the power to allocate quota protection company by company would allow Mr. Trump to favour some companies by giving them room to expand and punish others by leaving some of their production unprotected. The demand is particularly significant in the wake of the President’s threats to punish General Motors for announcing the closing of five auto plants – four in the United States and one in Canada – this week.

Canada has a similar side letter with the United States – exempting 2.6 million vehicles and US$32.4-billion worth of auto parts, more than current exports – but it is unclear whether American officials have also been pressing Ottawa to grant the White House the power to allocate the quota.

The move comes as the three countries prepare to sign USMCA, a renegotiated version of the North American free-trade agreement, at the Group of 20 summit in Buenos Aires Friday.

The U.S. demand on Mexican autos isn’t the only matter that remains unresolved as the signing approaches: The White House has declined to lift steel and aluminium tariffs on Canada and Mexico – despite discussions with both countries and a near-deal with Mexico earlier this month. Neither the White House nor the Mexican government responded to The Globe’s questions Thursday.

The USMCA signing will happen Friday morning in Buenos Aires. Prime Minister Justin Trudeau may decline to personally sign the deal in protest against the continuing steel and aluminum tariffs, and instead delegate the task to Foreign Affairs Minister Chrystia Freeland, a government source said. On Thursday, Mr. Trudeau’s office said the Prime Minister “will be present” for the signing – along with Mr. Trump and Mexican President Enrique Pena Nieto – but was silent on whether Mr. Trudeau would personally put his signature on the deal.

Despite the metals tariffs, Canada and Mexico are eager to move forward with the signing because of the side letters that protect the countries from potential auto tariffs. While the main text of the deal requires congressional ratification, the letters will take effect when they are signed.

The side letters leave open the mechanics of how the exemptions would work in practice if Mr. Trump imposed tariffs. The letters say only that the countries “will determine how to monitor and allocate or otherwise administer” the quotas.

Mexican officials are worried that giving the White House the power to dictate how the country’s quota would apply would put a chill on auto investment in the country: Car companies could not be certain that their exports to the United States would be exempted in the event that Mr. Trump decided to impose tariffs, one source with knowledge of the discussions said.

Such a situation would also give Mr. Trump a cudgel to hold over the heads of GM or any other company that chose to shut down facilities in the United States. In tweets this week, the President said that if there had been tariffs in place, GM “would not be closing their plants” in the United States.

It would also allow the United States to favour American automakers over European and Asian ones. U.S. officials have regularly raised concerns about overseas automakers building vehicles for the U.S. market in Mexico with foreign parts, rather than using North American supply chains, sources said.

Inu Manak, a trade expert at the libertarian Cato Institute think tank, said the language in the side letter leaves Mexico under no obligation to agree to the U.S. demand. However, she said, the Trump administration could use some other pressure tactic to cajole Mexico to acquiesce.

“The U.S. could impose tariffs in another area,” she said. “This letter can be altered at any point if they agree to a change.”

The United States has held talks with both Canada and Mexico on steel and aluminum tariffs, demanding its trading partners accept quotas in exchange for lifting the levies, said sources in all three countries.

One Canadian official said Ottawa would only agree to a steel quota that is far above the amount Canada exported in 2017, the last full year before Mr. Trump imposed tariffs. The official said Canada would not agree to any quota on aluminum: The United States does not have the capacity to produce enough aluminium to supply its own market, meaning that if Canada accepted a quota, the United States would wind up importing more aluminum from other countries.

A Canadian industry source said Canada prefers the metals tariffs to a bad quota deal because, at least with the tariffs, the costs are foisted on U.S. consumers.

An American industry source said that the Trump administration almost reached a deal with Mexico earlier this month that would have seen Mexico agree to a steel quota 130 per cent above its average exports between 2015 and 2017. U.S. negotiators, however, could not get the White House to sign off on the agreement. When they returned to the table, they demanded Mexico agree to a quota of 80 per cent of its previous exports. Mexico refused.

Daniel Ujczo, an Ohio-based trade lawyer, said GM’s announcement makes it harder for Mr. Trump to end the metals tariffs, lest he appear weak among his supporters in the Midwest.

“Lifting steel tariffs and going easy on China this weekend would lose him those voters forever,” said Mr. Ujczo, a lawyer in the Columbus office of Dickinson Wright. “If he goes soft, they’ll crucify him.”

The GM announcement does, however, give both Washington and Ottawa extra incentive to press ahead with USMCA. The deal contains new rules for the auto industry designed to discourage companies from investing in Mexico.

“USMCA will ensure less of this stuff happens,” said Flavio Volpe, head of the Canadian auto parts industry’s trade group. “It may be the first time Trudeau and Trump are on the same page on autos.”



Via: The Globe and Mail