Foreign OEMs oppose Trump’s NAFTA plan
Foreign car manufacturers with factories in the U.S. oppose president Trump’s proposal for a renegotiated North American Free Trade Agreement (NAFTA), which would raise the requirement for ‘North American content’ in regionally-produced cars.
NAFTA was launched in 1994 under the presidency of Bill Clinton. It provided a great boost for the Mexican economy, but many Americans complained that it had led to massive job losses – ignoring NAFTA’s overall benefits for the U.S. economy, and more important factors of manufacturing job losses, such as automation.
Bring back jobs
Nevertheless, president Trump last year threatened to withdraw from NAFTA if it was not renegotiated. His aim is to ‘bring back’ manufacturing jobs to the U.S. – especially in the automotive industry. Trump wants to change NAFTA rules in order to raise the share of locally-produced content in vehicles assembled in North America.
U.S. and Mexican negotiators were said to be close to a deal on car manufacturing, lifting the requirement for North American content in regionally-made vehicles from 62.5% today to at least 70%. Some 40% of the value would be required to come from high-wage locations (paying at least $16/h) – in other words: the U.S. or Canada.
That plan has met with approval from U.S.-based manufacturers. The American Automotive Policy Council (AAPC), which represents the ‘Big Three’ manufacturers in Detroit (i.e. Ford, GM and Chrysler), said it was “encouraged” by the direction of the discussions, adding that it shared Trump’s “overall goals of strengthening U.S. auto manufacturing and creating jobs”.
But in a previously unreleased letter to leading trade-focused members of the U.S. Congress, dated August 16th, a group of foreign OEMs called ‘Here for America’ voiced its opposition to the plan. It said the foreign OEMs “remain concerned that, without further clarifications, assurances and modifications, many (of us) will not be in a position to support (…) NAFTA 2.0”.
As experts have pointed out, some foreign OEMs who do some manufacturing in the U.S. but have smaller R&D staff in the country, may find it hard to meet the stricter content requirements. ‘Here for America’ includes major European OEMs such as VW, Daimler, BMW and Volvo, and Asian ones like Toyota, Honda, Nissan, Subaru, Hyundai and Kia. It accounts for nearly half of U.S. vehicle production.
The letter also pointed out that national security tariffs on cars, car parts and steel and aluminium could mitigate the benefit of NAFTA – putting a question mark behind the continued presence of foreign car manufacturing in the U.S. Once again, Trump’s interventions on trade threaten to have an effect opposite to their stated intention.
The foreign OEMs’ outreach to key U.S. lawmakers could raise Congressional opposition to Trump’s proposal, especially from representatives of the Southern states with important foreign car manufacturing presence (including Mississippi, Alabama and South Carolina).
It is as yet unclear whether the letter will have any impact on the talks between Mexico’s Economy Minister Ildefonso Guajardo and U.S. Trade Representative Robert Lightizer, which resume this week. If and when bilateral issues between the U.S. and Mexico (mainly involving the automotive industry) are resolved – possibly by early next week, according to insiders – Canada will rejoin the renegotiation for NAFTA 2.0.
Mexican and U.S. negotiators are close to agreeing on a five-year phase-in period for the proposed changes. One major issue not yet resolved is the U.S. demand for a 'sunset clause', which would oblige all parties to renegotiate NAFTA every five years. As some observers have pointed out, this would make long-term investment decisions a lot riskier than they are at present.