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NAFTA changes could mean 'lose-lose' outcome for auto industry

October 20, 2017
The auto sector is sounding alarms on the Trump administration’s efforts to overhaul the North American Free Trade Agreement, with the continent’s top parts supplier warning an expected push to increase content requirements in cars could result in a "lose-lose" situation.
Changes to rules of origin, which govern what share of a car must be sourced from NAFTA countries for the vehicle to receive the trade pact’s benefits, will add both complexity and costs, said Don Walker, chief executive of Magna International Inc., a Canadian global automotive supplier.
"If the required content to hit the threshold for a NAFTA vehicle is too high, people may say, ‘Look, it’s just too difficult, it’s too high, so we’ll just ship the vehicles in,’" Walker said in an interview in New York ahead of the talks. "In which case, they pay the duty, and it’s a lose-lose."
The fourth round of negotiations over NAFTA began Oct. 11, with signals mounting that the U.S. is putting potentially deal-breaking proposals on the table. The U.S. Chamber of Commerce and Mexico’s auto industry group already have come out against an anticipated proposal for U.S.-specific content requirements. Introducing such a rule, or raising NAFTA-made content requirements from today’s 62.5 percent, could risk disruption to the auto industry’s vast supply chain.
"We’re negotiating a NAFTA deal. It’s time after all these years and we’ll see what happens," said President Donald Trump, who made trade a key part of his 2016 presidential campaign. "It’s possible that we won’t be able to make a deal and it’s possible that we will."
Regional content
"If the regional content is by specific country, I think it adds a lot of complexity, and then every country would probably want regional content," Walker said. "If you have U.S. content and Canadian content and Mexican content, the reporting and the bureaucracy and the tracking becomes so complicated — and costly, quite frankly."
It will also be expensive for consumers, Mark Scarpelli, the chairman of the National Automobile Dealers Association, warned in a speech this month in Detroit.
"Anything that raises the price of a car will ultimately affect consumers and automobile sales," he said. "We are concerned, but at the end of the day, we don’t know what the rule-making is going to be."
Tariffs vs. job flight
Trump fixated on the auto industry and carmakers investing in Mexico throughout his campaign and early in his presidency, criticizing companies including Ford., General Motors and Toyota. He told workers near Detroit in March that the U.S. would become "the car capital of the world again."
John Bozzella, CEO of the Association of Global Automakers, said the group that represents overseas-based carmakers in the U.S. has been "blizzarding" Capitol Hill to explain why the expected NAFTA proposals are a problem. 
It’s been meeting with members of the Trump administration and lawmakers from states where vehicle manufacturers have a large presence as well as holding "extensive briefings" with Republicans and Democrats on Senate Finance and House Ways and Means committees, he said.
"We’re concerned that we may be on a course to upset the trade balance in NAFTA that has unquestionably led to a vibrant and successful auto industry in the United States," said Bozzella, whose group represents companies including Toyota, Honda and Nissan.
The U.S. had a $63 billion trade deficit with Mexico last year, compared with a surplus of $7.7 billion with Canada. The automotive trade deficit with Mexico was $74 billion. In other words, if trade in cars and car parts over America’s southern border were set aside, the U.S. would actually be running a trade surplus with Mexico.
Ontario, Canada-based Magna has more than 25,000 employees in the U.S. and supplies more original equipment parts by sales to carmakers on the continent than any other supplier, according to Automotive News rankings. Changing the rules now, after automakers and suppliers have invested across the region, would be a costly shift, Walker said.
"There’s been huge investments in Canada, the U.S. and Mexico, that are long-term assets," he said. "To try and change that would be extremely expensive for the industry."