Trump’s NAFTA stance at odds with reality

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More bluster than progress on NAFTA talks as U.S. digs in heels

It has been a few months since my first column on NAFTA 2.0 and in many ways a lot has changed, while in many other ways a lot has stayed the same.   

What continues to be evident is that there is a unified voice from the automotive industry in all three countries that NAFTA is working just fine, thank you. To date, there has not been a compelling case made by the U.S. government to clearly enunciate what problem they are trying to solve with respect to the automotive industry within the context of a renegotiated NAFTA agreement.   

To hear U.S. Commerce Secretary, Wilbur Ross explain the situation it would seem that he, and perhaps President Trump, are myopically focusing on trade balances within the NAFTA relationship. 

While it is true that there is a negative trade balance with Mexico, the same cannot be said of Canada — and at the end of the day, sectoral trade balances are a pretty facile way of assessing the benefits of a regional trade agreement.

That said, it is also clear that the Trump Administration cares very little for the benefits of the NAFTA for the region and cares very much about the benefits (or lack thereof in his view) of NAFTA for the United States.

Now that we have had a while to assess the so-called “poison pill” automotive rules of origin proposal presented by the U.S. Administration — yes, I said Administration as opposed to U.S. negotiators — the industry in all three countries remains flummoxed by a proposal that is not only unacceptable out of the gate to the Canadian and Mexican automotive industries, but perhaps more importantly to the broader U.S. automotive industry as well.   

Country-specific content requirements are antithetical to regional free trade agreements but this did not stop the U.S. from including such a proposal anyway

The fact of the matter is that no automaker (D3 or otherwise) can meet the 85 per cent regional content requirements laid out in the U.S. proposal, not to mention the 50 per cent U.S. content provision that was added in for good measure. Country-specific content requirements are antithetical to regional free trade agreements but this did not stop the U.S. from including such a proposal anyway.    

It is interesting that the 50 per cent U.S. content provisions are to apply to vehicles built in Canada and Mexico only.  The inference being that the Administration assumes that vehicles built in the United States have 50 per cent U.S. content.

Public comments made by Secretary Ross and USTR Lighthizer indicate that they believe that companies will find a way to adjust to the proposed content provisions and that this will result in the repatriation of vehicle
and automotive parts manufacturing to the U.S. from elsewhere.   

The reality is that the proposed content provisions combined with broader and more intrusive tracing rules are likely to have the opposite effect. Many vehicle manufacturers may reasonably conclude that it is easier not to try and meet that NAFTA preference requirements and simply export vehicles into the U.S. and pay the 2.5 per cent bound tariff on passenger vehicles going into the United States. It is unclear how this result helps anyone — least of all the American consumer who would be paying more for their vehicles under such a scenario.   

However, because the U.S. has a 25 per cent tariff on trucks, it may well be that the proposed content requirements would result in the production of more trucks in the U.S. than is occurring today.    

But this is not the panacea that the Trump Administration may think it is either. This is because the preferred, normal, efficient and global supply chain would be disrupted for a supply chain that is less efficient and comprised of suppliers that may not necessarily be of the same caliber.

Therefore, it is not beyond realm of possibility to have trucks built in the U.S. that would cost more and potentially be of lower quality than trucks built now. Moreover, when production costs go up, one way to reduce costs and improve efficiency is to substitute labour with automation.    

There is no point in presenting a counter proposal because then both countries concede that the U.S. proposal is a reasonable place to start the negotiations, when nothing could be further from the truth

Labour also gets substituted for automation in a scenario where vehicle production is repatriated to the U.S. To be competitive and efficient any new plants would reasonably have more automation and less labour, meaning that whatever auto manufacturing that might be repatriated to the U.S. will not result in more U.S. auto manufacturing jobs — which is one of the main reasons candidate Trump and then President Trump were using the automotive industry as the poster child of all things wrong with NAFTA, that is, the perceived migration of U.S. jobs to Canada and Mexico.

So where does that leave Canada, Mexico, and the automotive industry when dealing with an Administration that seems prepared not to let the facts get in the way of ideological positioning that plays to a specific political base? Short answer — nowhere.

With a proposal that has been pitched as a “take it or leave it” with the publicly stated positioning that Canada and Mexico must give up some of the privileges and preferences that they have enjoyed from a negotiated trade agreement that has served the industry well in all three countries for the last 23 years, there is nowhere for Canada or Mexico to move to with such a proposal.

There is no point in presenting a counter proposal because then both countries concede that the U.S. proposal is a reasonable place to start the negotiations, when nothing could be further from the truth.   

Reportedly, at the most recent round of negotiations that took place in Mexico City in November, Canada spent time attempting to demonstrate to the Americans how the proposal would actually hurt the automotive industry in the United States and harm the economy there.    

It remains an open question whether anyone was listening or if that even matters, because when the dust settles on all of this what matters is how the audience of one views the situation.

At some point the President is going to have to decide what is more important — keeping his commitment to his base to tear up NAFTA or having one of his legacies being the tanking of the North American economy with potential global ramifications if he decides to do just that.

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