[CTC] USTR demands wages be factored into NAFTA auto ROO

Tue Mar 27 06:26:59 PDT 2018

"By demanding what is essentially a minimum wage in the context of autos, Lighthizer could shore up favor with Democrats on Capitol Hill and incentivize the use of American parts because they already meet the wage threshold he is seeking, sources said."

USTR demands wages be factored into NAFTA auto rules of origin
March 26, 2018

U.S. Trade Representative Robert Lighthizer has pitched to his NAFTA counterparts a new automotive rule of origin methodology that would count wages equivalent to $15 an hour towards the regional value content of a car, sources close to the talks told Inside U.S. Trade.

In return for using his methodology that factors in wages, Lighthizer said he was willing to abandon a 50 percent U.S. content requirement and show flexibility on demands for an updated tracing list -- with the caveat that the final agreement on rules of origin would lead to more U.S. content and higher North American content.

The three countries on the political level have been quietly making headway on autos -- one of the most contentious issues in the talks -- prompting sources to believe a breakthrough on the topic could be announced by early April.

Lighthizer floated the new offer in separate meetings with Canadian foreign affairs minister Chrystia Freeland and Mexican Economy Secretary Ildefonso Guajardo earlier this month and stakeholders in both countries are now analyzing its viability, sources said.

Those talks have been kept quiet by USTR and congressional staff have not been briefed on the new ideas.

USTR did not respond to a request for comment on this story.

Lighthizer has often faulted low wages in Mexico as one of the factors that contribute to outsourcing. By demanding what is essentially a minimum wage in the context of autos, Lighthizer could shore up favor with Democrats on Capitol Hill and incentivize the use of American parts because they already meet the wage threshold he is seeking, sources said.

Congressional Democrats have told USTR that a new NAFTA should require Mexico to increase its wages<https://insidetrade.com/node/161702>, among other labor rules. USTR's initial labor proposal fell short of Democrats' hopes and negotiations over the labor text are expected to be contentious until the negotiations conclude.

A Democratic aide said the "rebalancing" proposal sounded "very intriguing" but added that there were a lot of outstanding questions about how it would work.

Asked whether the proposal was viable, the aide said: "Who knows. It seems designed to appeal to the Canadians and to put pressure on Mexico."

Some sources said the autos proposal was likely a non-starter for Mexico and that they expected the country to push back against Lighthizer's offer by pointing to the fact that even the U.S. federal minimum wage is below $15 per hour.

But others suggested that starting out with a higher number was indicative of Lighthizer's negotiating style and that the countries would likely find a middle ground that works for the U.S. but pushes Mexico to make changes. One industry source argued that Lighthizer asking for more than the U.S. minimum wage was "perhaps a populist move that he knows will get ground down."

"Fifteen dollars is likely a tactical marker, given that it's higher than the minimum wage in the U.S. and Canada, and in some cases above the starting wage in their supply chains," the source said. "But USTR could have tested it with the [original equipment manufacturers] first who pay twice as much."

Another source said any changes to wages would have to be phased in and that "anything that has a transition past the election is good for Mexico." Mexico will hold its presidential and Senate elections on July 1.

The three NAFTA leads have agreed to add steel and aluminum to the tracing list -- effectively shutting the door to Asian content and allowing for an expansion of the list by taking into account the inputs Lighthizer cares most about, sources said.

The potential breakthrough on autos and agreement to add steel and aluminum to the tracing list came as President Trump moved to impose a global tariff of 25 percent on steel and 10 percent on aluminum imports, which Canada and Mexico are temporarily excluded from.

Sources briefed on the process said administration officials believed the exclusion was granted because the countries "will do something to encourage more U.S. production" but noted that they could be added to the duty order "at any time" if the administration was wrong in its assumption.

USTR's chief rules of origin negotiator cut the seventh round of talks on the topic short and was called back to Washington<https://insidetrade.com/node/162070> for meetings with the U.S. auto industry. Lighthizer and his team have held what one source described as "quiet conversations" with companies and those talks have been ongoing.

An industry source said it was likely the countries could close out the automotive rules of origin by early next month, because once the negotiators find a viable solution and begin to gather input and approval from the auto industries in each country, negotiations can be wrapped up quickly.

"Everyone will have done their homework," the source said. "They know how much lower they can go on current rules and how much deeper they can go on the tracing list."

Private-sector sources described USTR's initial autos proposal as "draconian," and for that reason U.S. industry for months refused to engage with the administration. Industry officials have rejected the premise behind USTR's original proposal, saying the ideas were "unworkable" and that no car manufactured in the United States would meet its requirements. Industries in all three countries also said that any changes would have to be phased in and the new agreement should allow for a transition period that takes into account their production cycles.

Lighthizer is still adamantly pushing for the regional value content to be increased from 62.5 percent to 85 percent and did not give any indication that his team was willing to back off it, sources said. Instead, after having shown flexibility on other areas of its proposal, USTR is asking its trading partners to embrace that higher number and develop a methodology that will ensure they end up there.

A presentation by Canada on ideas for a new auto rule of origin was dismissed by Lighthizer<https://insidetrade.com/node/161779> at the sixth round of talks as trying to achieve "the opposite" of what the Trump administration had laid out in its initial proposal. During a briefing with reporters, Lighthizer took issue with the presentation's heavy focus on counting research and development toward regional content<https://insidetrade.com/node/161782>. Those activities are mostly done in the United States and Canada, and sources close to the talks said Lighthizer opposed that approach because counting R&D could allow companies to meet an increased regional value content threshold without making changes to their current supply chains.

Canadian officials have also consulted with the U.S. auto industry and Capitol Hill on their proposal, which angered<https://insidetrade.com/node/161960> Lighthizer. He argued that industry and Congress engaging with Canada on the issue would undermine his negotiating leverage.

Congressional sources said they told the Canadian delegation that their approach was a good first step but pointed out that some elements of it did not take into account the Trump administration's emphasis on Rust Belt jobs and efforts to counter outsourcing.

Lighthizer made clear in meetings with the auto industry and the other NAFTA ministers that he was "open" to considering different approaches if there was another way to get to his goal of higher U.S. and North American content.

Sources told Inside U.S. Trade that Lighthizer pushed his counterparts to conclude an agreement in principle by March 31<https://insidetrade.com/node/162442> and that a legal scrub of the new deal be completed by May 1 -- the day their temporary exclusion from steel and aluminum tariffs expires.

People briefed on those conversations said Lighthizer also expressed opposition to holding an official eighth round of talks and instead preferred to hold ongoing intersessional talks with his counterparts. -- Jenny Leonard(jleonard at iwpnews.com<mailto:jleonard at iwpnews.com>)

A new front on the fight for $15?

Michael F. Dolan, J.D.
Legislative Representative
International Brotherhood of Teamsters
Desk  202.624.6891
Fax    202.624.8973
Cell    202.437.2254

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