Auto industry expresses concern regarding NAFTA negotiations
INSIGHT ARTICLE |
According to the current U.S. administration, NAFTA has fundamentally failed, causing a goods trade deficit of $60 billion with Mexico.1 While trade with Canada has been more balanced in recent years, over time the United States has run a significant trade deficit with Canada, too. The administration has already imposed or is considering tariffs and duties on Canadian exports as a result of what the United States feels are unfair agreement policies or government actions.
There is concern among automotive OEMs, suppliers and dealers, however, that the administration could withdraw from the North American Free Trade Agreement altogether, a step auto industry executives urge the administration not to take.2
The administration, for example, insists that it wants to do away with a system of independent arbitration that allows companies to seek the elimination of tariffs. The system has been used primarily by Mexican and Canadian companies to force the United States to abandon protectionist measures found to be in violation of the agreement.
The United States wants to discourage the importation of auto parts from countries outside the NAFTA’s region, a potential area of concern for the automotive industry. Under the current agreement, a car assembled in Mexico can be imported into the United States without paying an import tax if at least 62.5 percent of the car, measured by value, was made in North America. The Trump administration wants to raise that bar, and to require that a significant portion of those parts come from the United States.
But carmakers are wary. The importation of some inexpensive parts helps to hold down the cost of the final product. But in general, a higher share of NAFTA components―combined with a higher share of American components―results in a more expensive car. Automakers and auto industry associations have joined the U.S. Chamber of Commerce and others in voicing concern regarding the administration’s proposed rule changes that could be harmful to the auto industry.3 One auto coalition has gone so far as to say that NAFTA has been key to auto sector production and jobs.
Mexico and Canada are taking consistent positions and are discounting the importance of trade deficits. Many economists say that the focus on bilateral trade is misplaced and a nation may run a deficit with one trading partner and a surplus with another. What matters most, they say, is the total impact of the agreement.
The good news is that there is general agreement among the three nations that NAFTA needs to be modernized. The agreement was written 23 years ago, before the advent of internet-based commerce, and there is broad support for stronger enforcement of workplace and environmental protections.
There is an opportunity to bring balance to our trading partners and benefit all parties. But it will be worth watching how negotiations unfold: There could be unintended consequences if the United States insists on changes that could unravel NAFTA and upsets domestic monetary values in the partner countries.
1. “Mexico Open to NAFTA Accord Against Forex Manipulation – Minister” (Oct. 24, 2017) Reuters.
2. “Auto Industry Tells Trump ‘We’re Winning With NAFTA’” (Oct. 24, 2017) Reuters.
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