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U.S. proposes to exempt itself from key provision of NAFTA auto demands

U.S. proposes to exempt itself from key provision of NAFTA auto demands

GREG KEENAN AND ADRIAN MORROW
TORONTO AND ARLINGTON, VA.
October 14th, 2017
Globe and Mail

The United States is proposing to exempt itself from a key automotive provision it has tabled in the North American free-trade negotiations – a move that experts say would seriously threaten Canada’s ability to land new investment by auto makers.

The Americans have proposed that vehicles shipped to the United States from Canada or Mexico contain 50-per-cent U.S. content, but would not apply that requirement to vehicles made in the United States that are exported to the other two NAFTA countries, according to sources familiar with the negotiations.

Such an exemption would make one of the most protectionist demands the United States has put on the NAFTA table even more stringent, and would divert investment by auto makers in new assembly plants to the United States and away from Canada and Mexico, auto industry officials and trade experts say.

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Auto industry officials believe such a proposal also poses a danger to existing assembly plants in Canada – which employ more than 20,000 people – in particular because auto makers could theoretically source parts from anywhere in the world, driving down the costs of making vehicles in the United States.

The boom in automotive investment in North America since the Great Recession has already largely bypassed Canada. The last new auto plant to open in Canada was in the depths of the recession in December 2008, while several plants have begun production in Mexico this decade.

Canada would be harmed more than Mexico because the vast majority of vehicle production in Canada is intended solely for the U.S. market.

Mexico also ships millions of vehicles to the United States annually, but it has free-trade agreements with 44 other countries. That gives car companies making vehicles in Mexico more diverse export opportunities than auto makers in Canada have.

In addition, some of the vehicles made in Mexico are for cars that are popular around the world – the Volkswagen Beetle, for example – while cars made in Canada are generally aimed at Canadian and U.S. buyers.

The demand, part of a series of U.S. proposals made at the fourth round of NAFTA negotiations in Alexandria, Va., on Friday, is so obviously unacceptable to the other two countries that it is unclear whether the Americans are trying to shock Canada and Mexico into submission or deliberately scuttling the talks.

Under one potential scenario, Canadian and Mexican refusals to accept the tough measures could be used as a pretext for the Americans to tear up NAFTA, as President Donald Trump has repeatedly threatened to do.

“It’s a revelation of the degree to which the United States wants these negotiations to be totally one-sided and favourable to them at the expense of the other NAFTA partners,” said veteran trade lawyer Larry Herman.

“What [the Americans] are doing – based on what you tell me – is saying, ‘We don’t have to abide by these rules but Canada and Mexico do,'” Mr. Herman said. “It’s highly preferential and favours production in the United States over the other NAFTA trading partners.”

Mr. Herman believes the talks will fail.

Mark Warner, a lawyer who specializes in Canada-U.S. trade, said the entire U.S. content requirement appears to be a negotiating ploy to push the other countries to accept stricter rules of origin on NAFTA-zone content.

“My general approach to the 50-per-cent requirement is that it’s all theatre. It’s not a bombshell to blow up the talks,” he said in an interview. “It’s meant to get Canada and Mexico to agree to the 85 per cent.”

Mr. Warner said a U.S. content requirement would likely break World Trade Organization rules and subject all three countries to a lawsuit by industry. He said American negotiators – led by trade czar Robert Lighthizer, a trade lawyer with four decades’ experience in the field – probably realize this, and only put the demand on the table to make it clear to Canada and Mexico that they are serious about getting tougher rules of origin.

“As a negotiating tactic, it’s not a bad one,” he said.

The proposal, if it comes to pass in a new North American free-trade agreement, could run counter to the Trump administration’s goal of repatriating both assembly and auto parts jobs that it believes have stampeded out of the United States and into Mexico since NAFTA took effect 23 years ago.

If vehicles made and sold in the United States are not subject to a rule requiring a minimum amount of regional or U.S. content, auto makers could import parts from low-cost countries in Asia, eastern Europe or elsewhere instead of buying them from relatively higher-cost U.S. suppliers.

“If true, this American protectionist proposal only works for the auto makers and leaves their entire supply sector unprotected,” said Flavio Volpe, president of the Automotive Parts Manufacturers Association of Canada, which represents Canadian suppliers. “How does this make sense?”

He noted that the U.S. vehicle market is large enough that demand for a particular vehicle can be satisfied by plants that make vehicles only for the domestic market.

That’s not the case in Canada, where the overall market is smaller. The best-selling Canadian-made vehicle is the Honda Civic, whose sales of 64,552 in 2016 represented only about one-quarter of the sales needed to sustain typical production of 250,000 annually at an assembly plant.

The U.S. content requirement was part of a package of tough auto demands presented by American negotiators to their Canadian and Mexican counterparts Friday at the Sheraton Pentagon City in a Washington suburb.

Another U.S. demand is that vehicles exported from one country to any of the other countries in NAFTA contain 85-per-cent North American content, compared with the current NAFTA level of 62.5 per cent.

And the Americans want every component of a car or truck – down to the steel and aluminum used in chassis or body parts and the sand used to make glass – to count toward the 85 per cent requirement.

That’s not the case under the current NAFTA regime.

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