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U.S. Pushes Nafta Partners to Accept a Wage Floor in Auto Sector

U.S. Pushes Nafta Partners to Accept a Wage Floor in Auto Sector

The proposal is designed to erode Mexico’s labor cost advantage and bring auto-sector jobs home

By William Mauldin
May 7, 2018

The Trump administration is seeking to complete its overhaul of the North American Free Trade Agreement with new rules that would penalize the Mexican auto industry unless it boosts wages—to roughly $16 an hour.

The administration is winning some support from U.S. auto makers for its Nafta proposals by including terms that would favor U.S. manufacturers over Asian and European rivals that produce cars in the U.S.

Support from Detroit might help the administration reach its goal of concluding a Nafta deal by mid-May, which could allow it to push the pact through Congress by year-end.

Under Nafta, U.S. manufacturers have produced in Mexico where wages are cheaper, but the Trump administration now is seeking to force Mexican factories to pay more for labor—or send auto jobs back to the U.S. or Canada.

Robert Lighthizer, the U.S. trade representative and lead negotiator for the Trump administration, is reworking Nafta to require that 40% of the content of any car that trades duty-free within the North American bloc to come from workers who earn above a particular wage level, according to industry officials familiar with the trade negotiations.

In recent talks, the U.S. side has discussed a wage floor of around $16 an hour, the officials said. By comparison, Mexican auto assembly workers made less than $8 an hour on average in 2017, with workers at parts plants making less than $4 an hour, according to the Center for Automotive Research.

Any manufacturer turning out cars with too little content at the wage threshold would face tariffs at the border. For light trucks, a higher amount—45% of the vehicle–would have to come from such higher-wage labor, the officials said.

U.S. negotiators have struggled for months to write concrete rules to bring back auto jobs without granting special privileges to the U.S. or explicitly singling out Mexico. Mexican and Canadian officials had flatly rejected a previous Washington proposal that would have required high levels of U.S.-specific content in cars.

Mexico’s auto industry—which includes major manufacturing operations run by auto makers from the U.S., Japan and elsewhere—rejected the latest U.S. wages proposal last week.

The Mexican government, however, is open to a Nafta deal before the July 1 presidential election, and senior Mexican officials are expected to introduce a counterproposal or compromise this week, when talks resume in Washington.

The American Automotive Policy Council, which represents Fiat Chrysler Automobiles NV , Ford Motor Co . , and General Motors Co. , said it is “encouraged” by the latest version of the rules. U.S. auto makers would get credit for higher wages not only on the factory floor but also in the areas of research and development, marketing and perhaps administrative work, industry officials say.

White-collar work in North America could contribute up to 15% toward the car’s 40% labor threshold—which could potentially allow a car to qualify for duty-free treatment if just 25% of its physical content were made with high-wage labor, the officials said.

The credit for R&D would lift the Detroit manufacturers, since they do the overwhelming amount of research, design and marketing work in North America. German, Japanese and Korean auto makers, by comparison, tend to do a greater amount of their R&D overseas.

On Tuesday, an association of global auto makers said it is “concerned” about the latest talks. “It is important that the agreement create feasible automotive rules that treat all U.S. auto producers equally,” said John Bozzella, president of Global Automakers, a group that includes Toyota Motor Corp. and Kia Motors Corp.

President Donald Trump was elected in part because of trade concerns in the Midwest. But German, Japanese and Korean auto makers have numerous plants in the Southeast, often in Republican districts, and lobbyists are urging lawmakers from those regions to complain that the Nafta proposals would put these plants—and the local workers they employ—at a disadvantage.

If the proposals are enacted, the burden for calculating whether a car meets the labor rule would fall largely on auto makers that do the final assembly. The rules could lead to significant costs for auto-parts suppliers as they shift production to help their customers, the big auto makers, meet the rules, in addition to administrative expenses to ensure compliance.

“We are approaching this with caution because of the potential for administrative burdens placed on suppliers,” said Ann Wilson, senior vice president at the Washington-based Motor Equipment & Manufacturers Association, which represents major auto suppliers.

Big Canadian auto suppliers could get some extra business back home under proposals promoting higher-wage labor. Still, Canadian firms are remaining cautious, in part because the rules could weigh on their Mexican operations.

“This proposal disproportionately affects Mexico and interests in Mexico and Mexican firms, and so it’s incumbent on the Mexican government to oppose it,” said Flavio Volpe, president of the Toronto-based Automotive Parts Manufacturers’ Association “We’re advising Canada not to comment or take a position until the Mexicans do.”

A spokesman for the United Auto Workers union declined to comment on the continuing negotiations. Overall, U.S. labor unions have been supportive of the Trump administration’s approach and say they could potentially support a new Nafta deal.

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