[CTC] TPP Could Have Weakest Auto ROO Ever

[Arthur Stamoulis]

Two articles below…

Inside U.S. Trade - 08/28/2015
AFL-CIO Warns TPP Could Have Weakest Auto ROO Ever; Blasts Loopholes
Posted: August 27, 2015
AFL-CIO President Richard Trumka last week blasted the automotive rules of origin that the U.S. and Japan have reportedly agreed upon in the Trans-Pacific Partnership (TPP) as potentially the weakest ever in a U.S. free trade agreement, while also criticizing the administration for failing to provide accurate information on its negotiating position or data to back it up.

In an Aug. 21 letter to U.S. Trade Representative Michael Froman, Trumka argued that a weaker rule of origin will lead auto companies to source parts from outside the TPP region, thereby conferring benefits on non-TPP signatories who do not have to conform to the agreement's rules on labor, environment, intellectual property and other issues.

"If this report is accurate, I want to convey to you my deep disappointment and anger that the U.S. government has so little regard for American jobs and the health of our manufacturing sector," Trumka said in the four-page letter.

The letter partly responded to an Aug. 20 report in Canada's The Globe and Mail newspaper that the U.S.-Japan deal in TPP entailed a regional value content threshold of 45 percent for autos and 30 percent for auto parts, citing anonymous sources.

Eduardo Solis, executive president of the Mexican Automotive Industry Association, this week confirmed to Inside U.S. Trade that the U.S.-Japan understanding includes these two elements, along with a list of seven auto parts that would automatically be deemed originating when the rule of origin is calculated (see related story). Like Solis, Trumka objected to all three of these elements.

But Trumka's letter also included confidential information conveyed by USTR staff to AFL-CIO officials in their role as cleared advisers. That information was redacted from the public version of the letter, but is visible in an unredacted version obtained by Inside U.S. Trade.

The redacted phrases mainly relate to the list of auto parts that would be automatically be considered originating.

"[I]n a recent discussion with your staff, they agreed that the new approach being considered is a 'hybrid deemed originating rule,' simply with a new set of products," read one redacted sentence. "Many of the items on this list are important job-generating products here in the U.S.," said the next sentence, which is not redacted.

The other redacted phrase suggested that U.S. officials had indicated to the AFL-CIO that the exceptions incorporated into the TPP rule "were meant to allow Japan -- which preferred 40 percent -- to easily meet the U.S. proposed standard.”

A list of parts automatically deemed to be originating has a basis in the NAFTA's complex traceability requirements. This is because any components that are not on the NAFTA traceability list are effectively deemed to be originating, sources said. This could include things like automotive seat parts and certain body parts, according to one expert.

Thea Lee, Trumka's deputy chief of staff, said in an Aug. 26 interview with Inside U.S. Trade that the AFL-CIO does not want to see the number of automatically originating products expanded in TPP. "We've made it clear that we don't want to see any further weakening of the TPP standard by expanding the list of [products] automatically counted as originating," she said.

On the rule of origin for automobiles, Trumka reiterated that the AFL-CIO and several other unions have proposed that the TPP have a regional value content threshold at least as high as the 62.5 percent threshold set out in NAFTA.

"It is only common sense that if there are twelve countries in TPP, it ought to be possible to have a higher ROO -- because that same content can be produced in one of twelve countries, rather than in two or three," he said. "So even if the NAFTA ROO stayed the same -- at 62.5% -- applying that rule to TPP would allow the same content to be produced in nine additional countries, dramatically increasing the opportunity to move auto supply chain jobs out of North America.”

The third element flagged by Trumka is a rule of origin for auto parts that is lower than the one for finished vehicles, which he said "further undermines the integrity of the auto ROO and incentivizes further outsourcing.”

This is because a lower rule of origin for auto parts would allow parts even with a small amount of regional content to be considered fully originating for the purposes of calculating the rule of origin for the finished vehicle, thereby inflating the amount of regional content in the finished vehicle. This is known as the "roll-up" phenomenon, which NAFTA sought to avoid by including tracing requirements that are not expected to be repeated in TPP.

Auto parts makers in the U.S., Canada and Mexico are also worried that the lower rule of origin for auto parts would exacerbate the roll up effect, according to industry sources. One source said that if such a low regional value content threshold for auto parts is included in TPP, a tracing requirement might be needed.

Trumka acknowledged that there are different methodologies for calculating rules of origin, and that USTR officials have at varying times suggested that a higher percentage of regional content under one method is equivalent to a lower percentage under another method. But he blasted USTR for failing to provide supporting evidence to back up these claims.

"My staff, and those of other unions with substantial employment in the sector, have been asking for five years for detailed analysis and data to support various assertions on how to compare one methodology to another. We have never received any data on this subject, and so are understandably skeptical. It appears that these equivalencies are asserted for the convenience of the negotiators," he said.

He also said that union representatives are also not satisfied with the "incomplete information" provided to them on the U.S. negotiating position on auto rules of origin in TPP.

"But due to the unaccountable lack of transparency from USTR, absolutely crucial decisions are being made without our input or voice," he wrote. "Thousands of good American jobs and an iconic American industry are at risk, and we don't even know what our government's negotiating position is or what it is based on.”

U.S., Mexican and Canadian automakers have proposed a 50 percent regional value content threshold for autos for TPP under the same "net cost" method used in NAFTA (see related story). They have argued that this provides an equivalent level of regional content as NAFTA because it does not include the tracing requirements, which they view as driving up the amount of regional content.

USTR is faced with the task of balancing the competing positions of U.S. industry and labor unions, as well as the prospect that an auto rule of origin that is too low would cause a backlash in Congress.

In addition, the big three U.S. automakers have focused their TPP advocacy mainly on ensuring long phaseouts of the U.S. auto tariff of 2.5 percent and truck tariff of 25 percent, and securing enforceable disciplines on currency manipulation in TPP, rather than on the auto rule of origin.


Inside U.S. Trade - 08/28/2015
NAFTA Auto Industry Proposal On TPP ROO Based On Eliminating Tracing
Posted: August 27, 2015

The U.S., Mexican and Canadian auto industries have recommended a rule of origin for light vehicles, engines and transmissions in the Trans-Pacific Partnership (TPP) that requires a regional value content level of 50 percent under the "net cost" method because they determined that this would be functionally equivalent to rule contained in the North American Free Trade Agreement (NAFTA), according to a Mexican industry representative.

Eduardo Solis, executive president of the Mexican Automotive Industry Association, said in an Aug. 26 interview that the three industries found the 50 percent number would require roughly the same amount of regional content as the 62.5 percent threshold included in NAFTA, but without the tracing requirements included in that deal.

These tracing requirements, which are not part of any other U.S. free trade agreements or any Japanese trade deals, are not expected to be included in TPP.

NAFTA sets out an illustrative list of tariff classifications for certain auto parts, including seats and engines, that must be traced if imported from outside the NAFTA region. These are called "traced materials." The vehicle producer needs to obtain documentation from its NAFTA suppliers as to the value of any "traced materials" that are incorporated in their component; this is known as the "traced value.”

Once the vehicle producer adds up the traced value of all components in the finished vehicle, they can use it to calculate the regional value content via the net-cost method, and therefore determine whether the vehicle qualifies for NAFTA preferences. NAFTA producers of auto parts have to go through the same process for determining origin if the part that they are making is on the tracing list.

Solis did not explain why the regional value content would be lower if the tracing requirements are removed. But industry experts said this is because the tracing system set up under NAFTA effectively allows items not on the tracing list to be counted as originating even if sourced from outside the NAFTA region. This includes things like automotive seat parts and certain auto body parts, one expert said.

If tracing is eliminated in the TPP, these materials would then have to be counted as non-originating for the purposes of calculating the rule of origin of the auto part or vehicle in which they are included. That could make it harder for an automaker to meet a 62.5 percent regional value content threshold for that item.

In contrast to the auto companies, the AFL-CIO and several of its affiliates have advocated for the TPP to contain a higher regional value threshold for autos and auto parts than NAFTA -- starting at 62.5 percent and increasing to 75 percent over several years. They have also called for TPP to include tracing requirements.


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