WASHINGTON—The auto industry is expected to be in negotiators' crosshairs as preparations speed up to renegotiate the North American Free Trade Agreement. It is part of an effort to fulfill President Donald Trump's promise to bring production jobs back to the U.S.
U.S. Trade Representative Robert Lighthizer notified Congress in May of the administration's intent to renegotiate the pact, triggering a 90-day consultation period.
With the talks likely to focus on a mix of complex, technical issues and some more politically charged ones, trade experts are warning auto companies to develop action plans to deal with changes that could alter supply networks that have been in existence for a quarter century.
A stated objective of the White House's agenda is to reduce trade deficits, such as the $60 billion gap with Mexico. For that, administration officials have zeroed in on tightening NAFTA's rules of origin, which dictate the amount of North American-made parts that must be used in manufactured products, such as vehicles, to qualify for duty-free status.
"Lighthizer and Secretary of Commerce Wilbur Ross believe auto rules of origin likely contribute to that deficit, so they want to look at whether tightening them is a solution," said David Hamill, a trade attorney and partner at the firm Arent Fox.
Hamill cautioned U.S. importers to expect greater scrutiny from U.S. Customs on shipments that claim to qualify for NAFTA benefits, as a logical outgrowth of Trump's "fair trade" approach. The government can ratchet up enforcement anytime, independent of negotiations.
Rules of origin
Under NAFTA, companies can claim duty-free treatment for imports of cars, engines and gearboxes if 62.5 percent of their content is from North America. The threshold is 60 percent for other vehicles and most other parts.
Trade experts say Trump officials are considering raising the threshold to 70 or 80 percent, with variations based on the product.
Nicole Bivins Collinson, who heads the international trade and government relations practice at Sandler, Travis & Rosenberg, said the Trump team also could insist on a U.S. content requirement within the regional threshold to drive more domestic production.
Some auto makers believe they can live with a higher content requirement, using their existing customs compliance resources to their advantage, said Hamill, who has clients in the sector.
But setting higher content targets could be complicated by the fact that much of the electronics used in today's cars and trucks comes from Asia. Based on current rules, it's possible in some cases for companies to count these non-NAFTA components as part of their NAFTA-origin content.
Rules of origin need "to be high enough so that free riders don't take advantage of the agreement without living up to the commitments," said Matt Blunt, president of the American Automotive Policy Council, which represents the Detroit 3 and supports NAFTA modernization.
"At the same time, you want it to be reasonable enough for manufacturers to utilize the free-trade agreement," he added. "We believe it's a rule that worked. It's the highest content requirement in the auto sector for any trade agreement anywhere in the world.
"We would just urge policymakers to be very thoughtful and engage in a data-driven process," he said. "If you set the rule too high, it's possible you'd undermine access to global supply chains for U.S. manufacturers and undermine their competitiveness."
One way to meet White House objectives and satisfy auto makers, Hamill said, is to count research and development costs toward the content threshold, since much of that takes place in the U.S.
Other auto issues that are expected to be on the table include:
- Tracing: Whether to simplify or tighten the labor-intensive requirements to trace non-NAFTA inputs back to their point of production.
- Averaging: Whether to continue allowing shippers to lump products from multiple plants with varying content levels to meet the overall NAFTA-content threshold.
- Duty drawback: Whether to eliminate restrictions on refunds of customs duties paid on imported materials that are used to produce a finished good that's later exported.
Stakeholders have until June 12 to submit comments to the U.S. Trade Representative's Office, which will hold a public hearing June 27 to seek more input on negotiating principles and positions to take into talks with Mexico and Canada.
Lighthizer has suggested an ambitious timetable, beginning negotiations in late August and wrapping up by year end.
Skeptics believe a NAFTA overhaul will be a multiyear process, but Hamill said concluding an agreement by early spring 2018 is achievable.
Political complications will crop up if the process bumps up against Mexico's July 2018 presidential election, playing into the hands of leftist candidate Lopez Obrador, as well as U.S. congressional elections that fall, Bivins Collinson said.
Some NAFTA changes will require legislation to implement, but the rules of origin are subject to presidential proclamation authority. Trump could send the negotiated changes to Capitol Hill, and if Congress doesn't object within 60 days, the changes go into effect.