Auto Manufacturers Disagree on Rules of Origin, but Agree That Section 232 Tariffs Negate USMCA Benefits
Determining how the U.S.-Mexico-Canada Agreement will change the economics of auto and auto parts manufacturing in America is critical for the U.S. International Trade Commission, which is responsible for estimating the economic effects of the pact. Of all the exports from the U.S. to its NAFTA partners -- $419 billion in 2015 -- $67 billion is automotive, according to the Center for Automotive Research. In the most recent data, the U.S. imported more than $58 billion in new vehicles from Mexico and Canada through the first eight months of 2018, and exported more than $18 billion new vehicles to those countries, according to the International Trade Administration.
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On the opening day of the scheduled two-day ITC hearing on USMCA, auto interests diverged in their assessment of the new rules of origin for autos, but agreed that steel and aluminum tariffs must be lifted on NAFTA partners, without quotas.
Matt Blunt, leader of the trade group American Automotive Policy Council, which represents Detroit's Big Three, said Nov. 15 that the tariffs on NAFTA partners' steel and aluminum need to be lifted, without quotas, by the end of the month. Ann Wilson, senior vice president for government affairs for the Motor & Equipment Manufacturers Association, agreed. "Such an outcome would bolster support for the agreement by our member companies," Blunt said. If quotas are part of the arrangement for ending the tariffs, he said, those metals will continue to be more expensive in the U.S. than elsewhere.
Association of Global Automakers CEO John Bozzella said his companies have "no clear indication if or when" Section 232 tariffs on steel and aluminum will be lifted in North America, while they had believed they would end with a rewritten NAFTA.
All the auto and auto parts trade groups complained about the administrative burdens the layered rules of origin would bring, though Blunt said there's enough flexibility and transition time that they are workable. Bozzella said the foreign automakers -- who use more parts outside the NAFTA region than the Big Three do, and who have been adding capacity in Mexico -- are "still evaluating how the revised agreement will affect their cost structures." Wilson said U.S. parts manufacturers have increased employment in the U.S. by 19 percent in the last five years, and suggested that NAFTA critics' focus on the rise in parts manufacturing in Mexico ignores the way that Mexican parts contain U.S. inputs. She said most wire harnesses are assembled in Mexico so that manufacturers "can take advantage of lower wages to assemble the part. However, many times the plastic connectors, the fabric, and the wire itself come from the U.S."
All the automakers oppose Section 232 tariffs on imported autos and auto parts, and said the specter of those tariffs will prevent companies from reshoring production in the U.S. in preparation for the stricter rules of origin content and wage rules. But Wilson said given that there are side letters on import caps from Mexico and Canada if Section 232 tariffs are levied, the Office of the U.S. Trade Representative "must now specify the processes for assessing the caps in the side letters."
Many of the questions from the panel focused on the low wages available in Mexico, and Commissioner Jason Kearns, a former Democratic trade staffer for the House Ways and Means Committee, told Bozzella his argument that low wages were not the primary factor for plant locations wasn't believable. Bozzella had posited that Mexico's free trade agreements are attractive for the auto industry, and Kearns noted that 80 percent of Mexican vehicle exports are to the U.S., not the rest of the world. The trade groups that represent foreign automakers, and the ones representing all automakers in the U.S., declined to speculate on how many vehicles that currently meet the regional content standard would no longer do so once the standard reaches 75 percent. The commissioners told the witnesses they need this sort of data within a month, because estimating how many autos would be imported under Most Favored Nation tariffs is vital to their assessment of the economic impact.
Those representing the foreign automakers also declined to say if the wage and regional content standards would lead to more production in the U.S. or in the NAFTA region. But Blunt said no massive changes would come immediately, but it could influence purchasing or investment in the coming years. "We do think, longer term, it will encourage more investment in the United States," Blunt said.
One of the commissioners asked if it was accurate to say that NAFTA led to a rise in Mexican participation in the supply chain, and that USMCA will not reverse that trend but will halt the trend's progression. Blunt said he thinks so. He also said he disagrees with the AFL-CIO contention that the inclusion of research and development jobs in the wage standard makes it not that meaningful. He said we need to keep R&D jobs in the U.S., particularly for new developments such as electric cars and self-driving cars, and this pact will encourage companies to do so.