U.S. eyes changes to NAFTA's rule of origin, potential disruptor for auto sector

by Alicja Siekierska (feat. Eric Miller)

Financial Post
July 18, 2017

The Trump administration is using “careful language” when it comes to its desire to strengthen the rules of origin in the North American Free Trade Agreement, industry experts say, something that could bode well for any potential impact on the automotive supply chain.

In the document released Monday outlining the United States’ objectives when it comes to NAFTA renegotiations, the U.S. trade representative said it wants to “update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.”

The U.S. also wants to ensure rules of origin “incentivize the sourcing of goods and materials from the United States and North America” and establish procedures that streamline rules of origin certification and promote strong enforcement.

NAFTA’s rules of origin currently stipulate that vehicle must have at least 62.5-per-cent North American content in order to gain duty-free access to all three member countries.

Flavio Volpe, president of the Automotive Parts Manufacturers’ Association, said the list of objectives did not contain any surprises to the auto parts industry.

“We’re seeing careful language around rules of origin as the administration and the industry south of the border has substantive conversations about how regulatory change would affect the industry,” he said.

“I think they have a very good understanding of how intertwined the three countries interests are in this sector and, very specifically, how deeply the American interest flows across both borders.”

While the objectives do not point to any specific changes that could potentially be made to rules of origin, U.S. Commerce Secretary Wilbur Ross has previously said the rules were “far too lenient.”

“Rules of origin are a loophole that allows material from outside to come in and yet be counted as though it was NAFTA-produced,” Ross said in a CNBC interview in March.

Obsolete provisions

“One of the many problems with the rules of origin in NAFTA as presently drafted is that in the case of say autos, it went specifically part by part…. Many of those parts are no longer even used in cars…. It’s an obsolete provision, and it’s essentially a back door way for a non-NAFTA good to take advantage of NAFTA.”

Potential changes to the rules of origin could mean raising the North American content level past the 62.5 per cent threshold, said international trade lawyer Mark Warner.

“The sense of it is that Trump probably wants to raise it higher than the 62.5 per cent, and that could mean raising it substantially to 80 per cent or playing around with the way it’s calculated so that, in effect, it’s closer to the 62.5 per cent,” Warner said.

“Another question is, based on the wording (in the document), whether you could have a second rule of origin that is U.S.-specific and would exist alongside that North American rule. It’s not clear that’s something they would want, but clearly it’s an indication that they want to move the content number up.”

Eric Miller, the president of Rideau Potomac Strategy Group who was an advisor during the 2009 auto bailout, said while he doesn’t anticipate specific country-by-country rules of origin to be implemented, changes to content levels and enforcement policy could disrupt the auto manufacturing industry.

Supply chain

“When you scramble those rules by either raising the overall North American content level, or tightening some of the accounting requirements that are out there, that will inevitably create impacts on the supply chain which, in my view, would likely mean potentially greater economic activity in North America but potentially higher cost for vehicles,” he said.

Volpe, however, said he is less concerned about renegotiations affecting the auto industry’s supply chain.

“Americans do well to have Mexican and Canadian supply when we compete against other major jurisdictions around the world,” he said.

“I’m not that concerned that anybody is going to shoot themselves in the foot when it comes to the automotive industry.”