Washington — Automakers are raising concerns about the future of the North American Free Trade Agreement after the Trump administration proposed increasing the required percentage of domestic parts in cars to qualify for duty-free treatment.
The proposal, which emerged in talks with Canada and Mexico in Washington over the weekend, calls for increasing — from 62.5 percent to 85 percent — the minimum percentage of parts that have to made in the U.S., Canada or Mexico in order to escape tariffs. The administration has also proposed instituting a new requirement that 50 percent of parts must come from the U.S. directly.
Jennifer Thomas, vice president of federal affairs at the Alliance of Automobile Manufacturers, which lobbies for automakers, said the proposal is not likely to have its intended effect of increasing U.S. jobs.
“This is an onerous proposal that is unprecedented, especially with the domestic content requirement,” she said. “We strongly believe this is going to have an adverse effect. It’s going to lead to a decrease in production, a decline in jobs and an increase in cost to consumers. A lot of companies are going to forgo the NAFTA benefit and just pay the tariff, so you’ll see a shift in production to other locations.”
Renegotiating NAFTA was a central tenet of Trump’s campaign as he promised voters to bring back jobs, especially in auto-dependent states in the Midwest. NAFTA was enacted in 1994 to create a free-trade zone between the U.S., Mexico and Canada.
On the campaign trail, Trump said he would end the trade pact with Canada and Mexico and slap a 10 percent to 35 percent tariff on vehicles and parts made in Mexico that are imported into the U.S. if NAFTA renegotiation is not a success. That could add $5,000 to $15,000 to the price of a car. Some domestic vehicles assembled by American workers in Detroit could be hit with import tariffs.
Trump has threatened recently to withdraw completely from the deal, which was enacted in 1994 to create a free-trade zone between the U.S., Mexico and Canada. In a Forbes interview published last week he said: “I happen to think that NAFTA will have to be terminated if we’re going to make it good. Otherwise, I believe you can’t negotiate a good deal.”
Thomas said Monday automakers are concerned the latest bid could lead to Canada and Mexico walking away from the NAFTA negotiating table.
“There is growing concern that this is ultimately going to lead to a withdrawal because with the contentious proposal that has been put on the table, it’s hard to see how the three countries can come to agreement,” Thomas said. “This would really set us back and hurt our manufacturing base in the U.S. and hurt our ability to export,” Thomas said.
Matt Blunt, president of the American Automotive Policy Council, which lobbies in Washington for Ford Motor Co., General Motors Co. and Fiat Chrysler Automobiles, agreed the latest demands are a tough pill for automakers to swallow.
“We are very concerned the approach they are taking could be counterproductive,” Blunt said.
Kristin Dziczek, director of the Industry, Labor and Economics Group at the Center for Automotive Research, said it “could have a perverse effect of having less jobs in the U.S.
“This is going to push more cars and more parts into ‘most favored nations’ status, which is only a 2.5 percent tariff,” she said, referring to rules established by the World Trade Organization that limit tariffs between countries that have given enough the designation.
The U.S. has most favored nation status with all 164 countries that are members of the WTO.
Dziczek said the lower tariffs with those countries could make trade with places with low-cost labor more attractive if NAFTA is drastically altered or eliminated.
“If you’re paying 2.5 percent, you can pay 2.5 percent from any country that has most favored status with the U.S.,” she said. “You’re not going to move production to the U.S. unless the cost of doing so is less than paying a 2.5 percent tariff.”
Linda Lim, professor emeritus of strategy at the University of Michigan’s Ross School of Business, said the Trump administration’s stance could make it harder for the U.S. to argue against protectionism from other countries such as China.
“The whole thing is self-defeating. It’s not going to create jobs. It’s not going to help the economy and it’s not going to help us against China.”
Lim said the automotive sector would be one of the hardest hit if the proposed changes are enacted. But she said the president may decide to blow up the deal anyway.
“The administration needs policy wins, and trade was such a big deal on the campaign trail,” she said. “They may be willing to take the economic cost — especially as the global economy is doing well — and shaft the auto industry.”