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USTR lowers regional value content demand for NAFTA cars to 75 percent

April 12, 2018
Jenny Leonard – Inside Trade

U.S. Trade Representative Robert Lighthizer has backed off his initial demand that a NAFTA car must include 85 percent regional value content to qualify for duty-free treatment and is now seeking a 75 percent threshold, sources briefed on the revised proposal say.

USTR has also reduced its call for five categories of auto parts — ranging from most critical to less critical — to a demand for just three, sources said. The most critical components would have to meet a 75 percent threshold, down from the previously sought 85 percent, and countries could earn credit toward that threshold if a part was manufactured by workers making at least $15 per hour.

The second category of components must meet a 70 percent North American value content and the third group 65 percent. Other auto parts not included in those categories will have to meet the same threshold they are subject to under the existing NAFTA rules.

Lighthizer is said to have floated the new ideas late last week. Chief negotiators and their teams briefed stakeholders on them this week, sources said. Negotiators are meeting in Washington, DC, for an informal eighth round of talks.

Lighthizer is slated to meet with his counterparts on the sidelines of the Summit of the Americas in Lima, Peru, this weekend to discuss the status of the talks. Sources familiar with the plans said the three NAFTA leads were also considering a ministerial meeting next week or later this month.

According to a schedule for this week’s meetings obtained by Inside U.S. Trade, rules of origin were on the agenda Wednesday through Friday.

While Mexico and Canada have rejected USTR’s initial demand that North American vehicles be made with 50 percent U.S. content, Mexican and Canadian officials have signaled that increasing the regional value threshold was a feasible option — depending on how big the increase was.

But the U.S. trading partners, working closely with industry in all three counties, have stressed that any changes to the rules of origin, including an increase in the regional value content requirement, should not disrupt existing supply chains. Instead, they have insisted that changes are focused on making North America more competitive with Asia.

Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association, said USTR’s revised proposal was a welcome step for long-term investors.

“The closer we get to a workable balance, the more likely the U.S. is to reap the benefit it seeks in this renegotiation,” Volpe said. “Positive movement on terms that dictate automakers’ abilities to assemble cars in the long term here is good.”

Another industry source argued the new proposal was “especially good for the Big Three” U.S. auto manufacturers because they are likeliest to meet all of the criteria.

Companies generally manufacture autos with a cushion under the current 62.5 percent rule to ensure their vehicles meet the required threshold, and industry sources have said for that reason an increase of up to 10 percent would likely be possible for many. The size of that cushion, however, varies.

Lighthizer withdrew his domestic content demand last month when he floated a new proposal that would incentivize manufacturing of critical parts in high-wage jurisdictions.

USTR proposed that countries could get up to 25 percent credit toward the new content rule for automotive parts if critical components were made by workers earning at least $15 per hour.

Guajardo called the approach “aspirational for Mexico” and said it was not achievable in the short term. At the same time, he welcomed USTR’s shift away from a U.S. content to an approach that was focused on the region, calling it “a little more moderate” and saying it allowed the countries “to accommodate the objective a bit better.”

Sources close to the talks said it was still not clear how the proposed system would be calculated and administered. They said the wage-centered approach had not been formally tabled but instead was being discussed conceptually between the ministers and the chief negotiators.

The schedule for this week also shows labor and textiles were discussed on Tuesday and financial services negotiators met Tuesday and Wednesday. Environmental issues will be discussed Thursday through Friday, according to the schedule.

Other outstanding controversial issues, like government procurement, dispute settlement and agriculture, are not on the agenda. — Jenny Leonard (jleonard@iwpnews.com)

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