Change in Rules of Origin Under NAFTA Could Make Trade Imbalance Worse, Lawmaker Says
Raising the NAFTA rules of origin to 80 percent could be counterproductive, said House Ways and Means ranking member Sander Levin, D-Mich., whose district includes Detroit suburbs. "If you raise it to 80 percent, it may well be that more and more of the content will be made in Mexico," Levin said at a March 8 Georgetown Law School event. "As important as the rule of origin is, I've been trying ardently to elevate this issue of the total [trade] imbalance."
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For Levin, the nearly wholesale move of auto parts manufacturing out of the United States is all about wage arbitrage. He said when he was in Mexico City last week for NAFTA round 7, he spoke with two Mexican autoworkers. One told him her take-home pay is 75 cents an hour, one said she makes $1.25 an hour after taxes. He believes enforceable labor standards could make a difference. "If that issue isn't addressed, there will be very few Democratic votes for a renegotiated NAFTA, no matter what is in there," he said.
With regard to a U.S.-specific content provision, he said there's a "need to really spend some time thinking about how you would ever apply it." He noted that Canadian and U.S. plants will frequently ship assemblies back and forth across the border repeatedly as they are built. "There are some intricacies -- we need to take a look at the details of it."
In a later session at the conference March 8, Lawrence Friedman, a partner at Barnes Richardson, said NAFTA continues to have frictions with rules-of-origin compliance. "What the trade would like is streamlined rules," he said. The content quotas to achieve duty-free status vary by vehicle type, by whether a part is after-market or from an original manufacturer, and there are two sets of tracing rules. If the rules-of-origin percentage number were to rise, it may be very difficult for companies to adjust to it, he said, though he thinks it could be done. Still, he said, "there are a million other issues where the rules of origin add compliance difficulties or liability risks."
The way costs are calculated for the quotas often overlook the way U.S.-headquartered companies with plants in Mexico attribute costs. "There are serious questions about what is a cost," he said. "People are not capturing all of the costs." Importers also carry the liability for origin questions, even though the exporters are responsible for filling out the paperwork, he said. If CBP audits the product and decides it doesn't qualify for duty-free status, it's the importer who pays the duty. "The problem is, you're always at the mercy of the exporters. What constitutes reasonable care" in examining the certificate of origin, he asked rhetorically. "The trade would like to have better guidelines on its ability to rely on the representations of the supplier." Friedman said he's had clients tell him: "My broker looked at it and said it looked OK. Why am I responsible for that?"