NAFTA redo could lead to tariffs on U.S.-built cars

Keith Laing
Detroit News Washington Bureau

Washington — A Dodge Durango or a Chevrolet Impala — domestic vehicles assembled by American workers in Detroit — could be hit with import tariffs as President Donald Trump’s administration opens new negotiations over the North American Free Trade Agreement.

Sixty-two percent of the Durango’s parts are made in the U.S. and Canada, and 24 percent come from Mexico, according to the National Highway Traffic Safety Administration, which tracks the percentages of domestic parts that are listed by automakers on price stickers under a 1992 law known as the American Automobile Labeling Act. Parts for the Chevy Impala are 60 percent made in the U.S. and Canada, with 21 percent coming from Mexico.

Both vehicles currently qualify for duty-free treatment under current NAFTA rules that require cars have at least 62.5 percent of their parts made in the U.S., Canada or Mexico. But some made-in-America hawks have pushed the Trump administration to advocate for an increase in the requirement to as much as 90 percent of autos to be made with parts that originated in the three countries in order to receive the exemption.

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.

Automakers are trying to stave off changes to the rules, arguing such changes would likely increase the price of vehicles such as the Durango and Impala in U.S. showrooms. In addition, they have banked for years on using low-cost Mexican labor for production of smaller cars that have tighter profit margins.

“Today’s highly complex automobile is a product comprised of thousands of parts sourced from a global network of thousands of suppliers,” Mitch Bainwol, president of the Washington, D.C.-based Alliance for Automobile Manufacturers, wrote in a recent letter to U.S. Trade Representative Robert Lighthizer.

He noted that the current threshold for domestic parts in NAFTA is higher than any other U.S. trade deal.

Bainwol added: “NAFTA’s strong regional bloc supports an expansive automotive supply chain in the U.S., Canada and Mexico. In many cases, auto parts and components cross U.S. borders more than eight times in the production and assembly process.”

The first round of talks between the three countries over potential changes to NAFTA will begin Wednesday in Washington. Administration officials have said Trump wants to “update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.” The administration has not identified a specific percentage of minimum domestic content that it would like to see.

Linda Lim, professor emeritus of strategy at the University of Michigan’s Ross School of Business, said drivers could be in for sticker stock if requirements for duty-free treatment are increased.

“It would increase the cost of cars to consumers, because obviously if they are buying parts out of the NAFTA region, they are buying them for a reason,” she said, noting that many high-tech parts used in modern cars originate in Japan. “Either they are not available or they are available cheaper somewhere else.”

Raising tariff limit

Some lawmakers have targeted rules in the current NAFTA pact that require cars have only 62.5 percent of their components to be made in the U.S., Canada and Mexico to qualify for the trade deal’s duty-free treatment. They say the percentage should be much higher.

“NAFTA must be renegotiated in a way that creates jobs, raises wages and grows manufacturing in this country,” said U.S. Rep. Debbie Dingell, D-Dearborn, who has co-introduced a proposal that calls for increasing the NAFTA region content requirement to 90 percent. “That means eliminating NAFTA’s off-shoring incentives and ban on Buy American and Buy Local policies, improving auto rules of origin, and meaningfully addressing currency manipulation, the mother of all trade barriers.”

Groups that lobby for automakers in Washington say such a change would be counterproductive.

“It is vital that the market access that exists throughout North America be preserved,” American Automotive Policy Council President Matt Blunt said. “The current rule has worked. It’s the highest auto content requirement of any free-trade agreement that the U.S. has. It’s kept out free-riders, but it’s been something that’s accessible and allows the agreement to be used by those who want to build cars in North America.”

Blunt’s group represents Ford Motor Co., General Motors Co. and Fiat Chrysler Automobiles in Washington.

Jennifer Thomas, vice president of federal affairs at the Washington-based Alliance of Automobile Manufacturers, which lobbies for most major automakers — domestic and foreign — agreed: “We think the 62.5 percent (regional value-content) requirement has been very effective on striking a balance to ensure that automakers continue to source from the NAFTA region,” she said.

Critics of the current rules-of-origin rules have painted a starkly different picture, arguing that increasing the requirements for duty-free treatment is essential to reducing the U.S. trade deficit with neighboring countries, especially Mexico.

“Mexico has used their workers having no rights and suppressing labor costs as a key part of their industrial policy,” U.S. Rep. Sander Levin, D-Royal Oak, said in a statement. “That has been the harmful effect of NAFTA for both workers in Mexico and surely in the U.S., costing many, many American jobs.”

Lim, the University of Michigan professor, said increasing the percentage of car parts that have to be made in the NAFTA region would not automatically result in more jobs in the U.S.: “Most likely the labor-intensive parts would be produced in Mexico and the high-tech parts would be produced in the U.S. by robots, so there’s no jobs there.”

Addressing currency issues

Renegotiating NAFTA was a central tenant of Trump’s campaign as he promised voters that he would take steps to improve economic conditions, 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. The trade deal has been blamed for auto companies moving production of smaller cars to Mexico.

There is less agreement among automakers about whether and how currency manipulation should be addressed in the upcoming NAFTA talks. U.S.-based car manufacturers have accused foreign governments of taking steps to make sure the U.S. dollar trades lower against their currencies in a bid to boost profits for their nations’ industries.

The AAPC’s Blunt, who represents the Detroit automakers, said all free-trade agreements, including NAFTA, should have strong language that prohibits currency manipulation.

Ford has been particularly vocal in urging a hard line against currency manipulation. The Dearborn-based company said in a statement: “Foreign currency manipulation is the 21st-century trade barrier, and we strongly support the inclusion of this top-tier issue in the U.S. negotiating objectives for NAFTA.”

John Bozzella, president and CEO of the Association of Global Automakers, which represents international automakers in Washington, said currency manipulation should be addressed in other forums that allow for leaders of the nations involved in trade agreements to resolve differences. “Our view is there currently exist international forums to discuss and resolve those issues,” he said.

Bozzella noted that since NAFTA was ratified 23 years ago, a million more cars are produced annually in the United States and the number of cars that are exported every year has doubled. He added that 40 percent of parts used to build vehicles that are produced in Mexico are made in the U.S., compared to 5 percent before NAFTA.

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Twitter: @Keith_Laing