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USMCA pact could bring auto tariffs

October 19, 2018
U.S. trade partners and business leaders are hoping the Trump administration will refrain from the auto tariffs that have long been under consideration, but the recent U.S.-Mexico-Canada Agreement on trade may give the administration an extra incentive to add them.
 
That’s because one of the main features of the USMCA is a change to the "rules of origin" for autos: how much of the car must be made in North America for it to be duty-free. In order for those rules to have real teeth, according to trade experts, they may need to be accompanied by the tariffs.
 
The USMCA would require that 75 percent of a car be made with parts sourced from North America in order for it to qualify as made in America and avoid the tariff. That’s up from 62.5 percent under the old North American Free Trade Agreement, which USMCA would replace. Anything less than 75 percent and the car would lose its advantage under Most Favored Nation trade status and manufacturers would have to pay an additional 2.5 percent in taxes on each one.
 
That tariff would cut into the profits of companies that source parts outside of the U.S., but might still be worth it if the cost of complying is even higher, which it easily could be, said Phil Levy, senior fellow of the Chicago Council on Global Affairs. That is, companies could simply choose to pay the tariff. That calculus would change, though, if the Trump administration also adds the additional auto tariffs, expected to total around 25 percent, that the Commerce Department is long past due to report on.
 
Having both tariffs in effect would provide a much stronger reason to abide by the rules of origin.
 
"Suppose you were told to get a $100 repair to your car, but if you don’t, the fine is $5. You’re gonna pay the fine. This is the equivalent of that. … The penalty for not meeting the rules of origin is pretty small," Levy said. "But if they go ahead with the [additional] tariffs then the difference could be huge. Now you might get companies saying, ‘It is worthwhile to invest in North America.’"
 
But other countries would be unlikely to strike trade deals with the U.S. if auto tariffs were in place. Potential talks with Japan or the European Union likely would be on hold if the auto tariffs exist. They also could affect a deal previously negotiated with South Korea, which hasn’t been ratified by its legislature because it has been waiting to see what the U.S. does on auto tariffs.
 
The U.S. could negotiate exceptions to any future the auto tariffs on a case-by-case basis, said Bryan Riley, trade policy expert for the National Taxpayers Union. "The administration could offer to remove on Japan if it negotiates a deal with us. Same with the European Union. But the same thing could happen with Mexico, too, if the costs of complying with the deals are too high, they could just keep paying the current 2.5 percent tariffs," Riley said.
 
But granting those exceptions would undermine the point of the rules-of-origin changes. In short, the administration can have tougher rules of origin to shift more of the auto industry back into North America or it can strike new, broader trade deals with others. But it may not be able to have both.
 
The Trump administration still might try though, Riley said. "That suggests they might want to come up with some way to have a [rules-of-origin] tariff greater than 2.5 percent," he said.
 
 

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