The Trump administration’s approach to the North American Free Trade Agreement (NAFTA) keeps getting murkier. And although I agree that keeping the other parties to a negotiation off balance from time to time, and holding cards close to one’s vest, can be excellent tactics, the latest apparent twist in American policy doesn’t appear to be explained by such considerations.
Let’s start with the excellent insight contained in a Reuters article today about one of the centerpieces of NAFTA reform identified by the administration – the rules of origin (ROO) for autos and other light-duty passenger vehicles. These treaty provisions have been rightly targeted by Team Trump negotiators from the standpoint of U.S. interests because motor vehicles and parts comprise such a large percentage of the goods exchanged throughout North America, and because since NAFTA went into effect, contrary to its supporters’ promises, the American automotive sector has become less, not more globally competitive.
The NAFTA ROO are ostensibly aimed at encouraging automotive manufacturing inside North America and currently require that 62.5 percent of a vehicle’s value come from within the free trade zone in order to be exempted from tariffs. The administration’s response is widely described as a toughening of these rules because it would raise this threshold to 75 percent.
But there’s always been one huge catch that I’ve been tweeting about consistently: Unless the tariff penalty imposed on vehicle and parts-makers outside North America is greatly increased, boosting the duty-free content threshold will have little impact on these companies’ production and employment decisions. The reason? The current NAFTA external tariff on these products is only 2.5 percent. (Just FYI, this point was first made during the original NAFTA debate, in this Economic Strategy Institute study to which I contributed modestly.)
It’s true that raising the content requirements might tip the balance toward manufacturing in North America from time to time. But generally speaking, as the Reuters article points out, the tariff penalty is simply too easy for auto-makers the world over to absorb. As reporter Nick Carey writes, companies that don’t comply “could simply pay tariffs of around $800 to $900 per vehicle and buy low-cost parts from Asia to offset the cost….” Their national governments could also help them negate the tariffs’ impact by devaluing their currencies, or by boosting the Value-Added Tax rebates they award to exporters. Therefore, the higher the external North American tariff, the likelier these non-North American companies and governments, along with North American auto-makers who source from outside the free trade zone, will be to cry “No mas!”
The same problem, incidentally, will sandbag the Trump administration proposal to condition duty-free treatment to another requirement: that certain percentages of the content of vehicles produced in Mexico be made by workers earning $16 per hour – which would bring these wages much closer to American and Canadian levels and remove much of the cost advantage of manufacturing in Mexico. Yet there’s been only the scantiest evidence that the administration understood that its ROO and wage proposals needed much stronger tariff teeth in order to achieve its goal of restoring automotive production and jobs to the United States.
That is, apparently, until three days ago. It’s been reported that, at a wide-ranging White House meeting last Friday with executives from U.S. and foreign-brand auto companies, he is said to have mentioned the idea of slapping a 20 percent tariff on vehicle imports. If such reports are accurate, do they mean that this stance is this now part of the American NAFTA negotiating position? Would it depend on North American content levels? And if the President is serious, does he recognize that this move would surely violate the nation’s World Trade Organization tariff commitments?
These questions have perfectly good answers – and answers consistent with the President’s oft-stated NAFTA revamp goals. But why has it taken so long to provide them? And why has so much of the administration’s broader strategy toward the crucial issue of ROO remained so uncertain after so many months of negotiations?