[CTC] Sources: USTR to demand 50 percent U.S. content in NAFTA auto rules of origin

[Arthur Stamoulis]

INSIDE US TRADE
 
Sources: USTR to demand 50 percent U.S. content in NAFTA auto rules of origin

October 05, 2017 
The Trump administration is moving forward with a rules-of-origin proposal for autos and auto parts that includes a 50 percent U.S. domestic content requirement and would increase the NAFTA regional value content requirement from 62.5 percent to 85 percent, sources told Inside U.S. Trade.

Another aspect of the proposal -- as it is currently written -- is an expanded tracing list that includes all components of a car, the sources added.

Items on the tracing list that are imported count as a non-NAFTA input when calculating regional value content. Items that are not on the tracing list, such as steel, are considered to have originated in the NAFTA region, regardless of their actual country of origin.

An auto industry source called the proposal a “strong, undoable opening position as likely to be opposed by the domestic industry as by the two counterparties.”

Several other sources described it as “Draconian” and warned that it could seriously harm the short- and long-term competitiveness of the U.S. auto industry.

These sources also claimed the U.S. approach to rules of origin runs counter to the idea of a free trade agreement, with one arguing that agreeing to a domestic content requirement in NAFTA 2.0 would set a dangerous precedent for Canada and Mexico in their trade negotiations with other countries.

The proposal has moved through the interagency process, sources said, and congressional staff members were briefed on it this week. Some sources, however, said it was possible the final rules-of-origin text that USTR will table at the NAFTA negotiating round next week could be modified after Capitol Hill briefings this week.

When briefing committee staff on the text, sources said USTR officials made clear it was U.S. Trade Representative Robert Lighthizer’s overall objective to “make it as expensive as possible” for auto companies that produce in Mexico.

Because the administration has shared some NAFTA proposals with staff and lawmakers without first securing the backing of all other government agencies, sources told Inside U.S. Trade that congressional staff, in briefings with USTR this week, pressed administration officials on whether the text on auto rules of origin had been cleared via the interagency process.

But one source said the administration has “tried to combine” the interagency and Capitol Hill processes and suggested that USTR might have given some of the auto ROO text to congressional staff as it was also going through the interagency process.

Some sources said the definition of whether a proposal has been “cleared” is ambiguous given that USTR staff has told other agencies that Cabinet heads must weigh in with Lighthizer directly if they have a problem with a specific proposal.

Overall, though, sources told Inside U.S. Trade they were unsurprised by the content of the proposal given Lighthizer’s opening remarks at the inaugural NAFTA round in August. The USTR said then that rules of origin, “particularly on autos and auto parts, must require higher NAFTA content and substantial U.S. content <https://insidetrade.com/node/159912>. Country of origin should be verified, not ‘deemed.’”

Unclear to many in the business community, as well as to Canadian and Mexican negotiators and to some U.S. lawmakers, is how the Trump administration defines “substantial.” USTR first made clear it was pushing for a domestic content requirement at the second round of NAFTA talks in Mexico City, where sources said values between 35 percent and 50 percent were discussed, but no proposal was tabled.

Sources described the auto industry as “anxious” and noted that auto company and auto parts representatives were present at each negotiating round to make the case against a domestic content requirement. The representatives also repeatedly stressed that NAFTA’s regional value content requirement -- 62.5 percent -- is the highest in any U.S. free trade agreement. Accordingly, some contended that an increase of no more than 10 percent could be feasible for most in the industry.

They cautioned the administration not to push too hard on increasing the regional value content requirement because, as one source put it, “anything that decreases your flexibility on sourcing is not good for business.” Companies in the automotive industry have the flexibility to source 37.5 percent from outside the NAFTA region, and the source said many assemblers are taking “full advantage” of that percentage.

Some sources said that while the administration might draw the ire of the auto industry with its approach to rules of origin, it could try to mollify the industry by including currency disciplines -- one of the core demands made by the “Big Three” U.S. auto companies.

But former Missouri Gov. Matt Blunt, president of the American Automotive Policy Council -- which represents the public policy interests of Ford, GM, and Fiat-Chrysler -- disagreed with that notion.

“The potential unintentional consequences could be so negative that you cannot trade a poorly crafted rule of origin for another part in the agreement,” he told Inside U.S. Trade. -- Jenny Leonard (jleonard at iwpnews.com <mailto:jleonard at iwpnews.com>)


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