Buckle up. This week, as Canada, Mexico and the United States sit down to talk NAFTA, all eyes—and hopes—are on the parties as they try to save the agreement from the same ill fate as other multilateral agreements in recent months. Most public debate on trade negotiations tends to be about tariffs, loosely defined as a tax on a product. Fewer of them are about other key aspects such as rules of origin, the criteria needed to determine the national origin of a product.
Why does this matter? Because in this next round of talks, the U.S. will focus on a change in rules of origin, specifically for the automobile industry, a crucial industry in terms of manufacturing jobs and investment, especially between the U.S. and Mexico.
Currently, to avoid duties–which ultimately fall on consumers–a car must contain 62.5% of North American content after a review of an automobile’s tracing list. Whether this is Mexican, American or Canadian is beside the point; one of the guiding principles of a principle of a free trade area (FTA) is there are no country-specific rules of origin. But this 62.5% regional minimum is the highest in any U.S. FTA and foreign and domestic automakers argue that this number is already high. In fact, this content requirement increased to 62.5% from 50% over an eight-year period from 1994 to 2002.
In the past few days, there have been talks of a proposal to increase this number to 85% North American content. The Trump administration will push for 50% of the 85% total to be domestic (U.S.-only) content. This move towards increased protectionism is ludicrous and, as many have pointed out, imperils the future of NAFTA. In addition, this “Buy American, Hire American,” approach could lead to contractions in the economy as supply and production chains are broken–something the administration has omitted.
A report published in October 2017 by the American Automotive Policy Council shows that of the U.S.’ Big Three (Ford, General Motors and Fiat-Chrysler Automobiles), “only 3 in 5 models has 55% or more domestic content.” Focusing on cars that are “Made in America” is incompatible with the auto industry today, as automation is quickly disrupting the traditional manufacturing process.
What’s more, this insistence on making an “American car”–an outdated concept that sounds positively like something from Mad Men—ignores the intricacy of supply chains that NAFTA has created over the past 23 years. The elaboration and manufacturing of the parts that make up a steering wheel, for example, goes 10-20 levels deep in the supply chain. To further illustrate this point, the Wall Street Journal reports that “about 56% of the components used to build General Motors Co.’s Chevrolet Silverado—its most profitable product globally—is sourced from Mexico, according to federal data. Ford Motor Co.’s Fusion family sedan gets 60% of its content from south of the border.”
It is also interesting to see these dynamics operate at the state level. Michigan, for example, relies heavily on NAFTA. This hub-state for U.S. automakers “sends 65% of its exports to Canada and Mexico, accounting for more than 7% of the state economy with a value of more than $35 billion,” Fitch said in a report few weeks ago.
In order for more states and companies to take advantage of regional and global trade opportunities, trade policy narratives should focus more on competitiveness, looking at how to improve the economy to compete at the global level. If the Trump administration insists on protectionism, the American economy will enter a vicious circle; as it falls behind its non-protectionist peers, it will increasingly need protectionism to compete.
The empirical reality shows that a majority of global trade is now intra-firm trade. In this context, raising NAFTA tariffs will substantially erect restrictions on trade between affiliates of U.S.-based multinationals, thus harming more American firms than helping them. In a recent piece on the Distributional Consequences of Preferential Trade Liberalization, published in International Organization, Leonardo Baccini, Pablo M. Pinto, and Stephen Weymouth show that U.S. preferential tariffs result in increased sales to the United States from the most competitive subsidiaries of multinational corporations operating in partner countries. They also find an increase in market concentration in partner countries following preferential liberalization with the United States.
So, get ready. The NAFTA negotiations are heading down a rocky road. Unrealistic expectations and an attempt to “ensure a level playing field for American manufacturing going forward,” —via increased protectionism from “careless and unfair trade deals [that] have severely disadvantaged American exports” as President Trump declared on October 6th on National Manufacturing Day—threaten to derail the progress and economic integration built up by NAFTA over the past quarter century.
Nicolas Albertoni (@N_Albertoni) is a Ph.D. student in Political Science and International Relations at the University of Southern California.
Maria Fernanda Perez Arguello (@mfperezcr), is a graduate of Georgetown University’s School of Foreign Service with a focus on Political Economy. She is currently a free lance consultant on trade issues.