Trump NAFTA demands could have unintended effects
Washington — A Chrysler Pacifica built in Canada could be hit by tariffs when shipped to the United States under a contentious proposal from the Trump administration in negotiations over the North American Free Trade Agreement.
U.S. negotiators proposed increasing the minimum percentage of parts that must be made in the U.S., Canada or Mexico — from 62.5 percent to 85 percent — in order to escape tariffs when imported to this country. And they want to require that 50 percent of parts must come from the U.S.
That would mean the Pacifica and several other vehicles made by Detroit carmakers could be hit by import taxes when sent here. Only 44 percent of the components of the Pacifica — which is built in Windsor — originate in the U.S., according to a study conducted by American University. And industry observers say the demands could raise the price of cars and actually drive production offshore by causing carmakers to just pay the tariff and shift production to countries with lower labor costs.
Canada and Mexico this week rejected what they see as a hardline proposal, and pushed the time frame for resolving differences into 2018. The next round of talks take place in Mexico on Nov. 17-21.
“We have seen proposals that would turn back the clock on 23 years of predictability, openness and collaboration under NAFTA,” Canadian Minister of Foreign Affairs Chrystia Freeland said Tuesday in a press conference at the conclusion of the latest round of negotiations in Arlington, Va. “In some cases, these proposals runs counter to (World Trade Organization) rules. This is troubling.”
Mexican Secretary of Economy Ildefonso Guajardo Villarreal added: “In order for this effort of the United States, Canada and Mexico to be fruitful, we must understand that we all have limits.”
U.S. Trade Representative Robert Lighthizer said he was “surprised and disappointed by the resistance to change by our negotiating partners.”
“NAFTA has resulted in a huge trade deficit for the United States and has cost us tens of thousands of manufacturing jobs,” Lighthizer said. “The agreement has been come very lopsided and need to be rebalanced.”
A 50 percent requirement for domestic content would trigger import duties not just for the Pacifica, but for the Ford Fusion, which is built in Mexico with 48.5 percent of its parts coming from U.S. A GMC Terrain built in Mexico with 43 percent of its parts coming from the U.S. also would also face tariffs if it was sold domestically.
But a Toyota Tacoma — which is built in Mexico and in Texas with 52.5 percent of its parts coming from the U.S. — would clear the threshold.
Paul D. Ryan, vice president of trade and competitiveness for the Washington, D.C.-based Association of Global Automakers, which lobbies for international carmakers, said the Trump administration’s demands are “unprecedented, and I think they’re both unrealistic and unworkable.”
“I don’t think it’s anything our trading partners could accept,” he said.
Renegotiating NAFTA was central to President Donald Trump’s campaign as he promised 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.
Trump vowed to 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. That could add $5,000 to $15,000 to sticker prices.
Critics have noted Mexico will continue to be attractive to automakers because it has free-trade agreements with more than 40 countries that are separate from NAFTA. Additionally, they note the U.S. has most-favored nation status with all 164 countries that are members of the World Trade Organization, including Mexico, Canada and China, which limits tariffs on most traded goods to 2.5 percent.
Kristin Dziczek, director of the Industry, Labor and Economics Group at the Center for Automotive Research in Ann Arbor, said the Trump administration’s latest demands could push more auto companies into claiming most-favored nations status, meaning they would pay only a 2.5 percent tariff for cars imported from Canada and Mexico if they fall under the 50 percent threshold. Automakers, she said, are not going to move production to the United States unless the cost of doing so is less than paying a 2.5 percent tariff.
Then there’s the “chicken tax.”
Without NAFTA, pickups and SUVs built in Canada or Mexico and then sold in the U.S. would be subject to a 25 percent duty imposed by former President Lyndon Johnson in response to tariffs by France and West Germany on U.S.-raised chickens.
Dziczek said the higher tariffs for pickups and SUVs could force automakers to be more creative in their vehicle designation. She noted that crossovers have already blurred the lines between SUVs and passenger cars.
“A 25 percent tariff is going to make you think about how to get around it,” Dziczek said.
Dziczek said auto companies claimed NAFTA’s duty-free treatment for 99.5 percent of the cars that were imported from Canada and 99.7 of the vehicles that were imported from Mexico in 2016.
She said the proposed changes to NAFTA could put U.S. auto companies at a disadvantage against global competitors.
“Every vehicle that is traded in the world has a portion of that car that is done in a low-cost, or some would say best-cost, country,” she said. “If you’re competing in a global market and you don’t have a low-cost or best-cost country, you’re going to be at a disadvantage.”
Alan Deardorff, professor of public policy and economics at the University of Michigan, said it’s not clear how Trump’s NAFTA proposals will impact employment in the U.S.
He noted automakers would be free to import cars cheaply from other U.S. trading partners, except in the case of light trucks that would face higher tariffs due to U.S. trade law.
“If they are no longer trying to qualify for preferential tariffs, they might as well import parts from China,” Deardorff continued.
Linda Lim, professor emeritus of strategy at the University of Michigan’s Ross School of Business, said the Trump administration may be trying to “self-sabotage” the NAFTA talks with its strident domestic-content proposals.
“What’s really happening is the Trump administration is not very enthusiastic about NAFTA,” she said. “One thing they can do is make demands that are so extreme they kind of self-sabotage. I’m not saying that’s what they’re doing definitively, but it’s quite ridiculous to suggest such a high local percentage.”
These cars built in Canada or Mexico by Detroit carmakers would face tariffs on U.S. sales under the Trump administration’s NAFTA proposal (U.S. content figures are from an American University study):
■Cadillac XTS, assembled in Canada, 49 percent U.S. content
■Ford Fusion, assembled in Mexico, 48 percent U.S. content
■Chrysler Pacifica, assembled in Canada, 44 percent U.S. content
■GMC Terrain, assembled in Mexico, 43 percent U.S. content