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<h1 class="title" style="margin: 0px 0px 10px; padding: 0px; border: 0px; color: rgb(51, 51, 51); font-size: 1.833em; line-height: 26px; font-family: Arial, Helvetica, sans-serif;">
TPP Auto ROO Most Likely To Hurt Makers Of Less Complex Parts: Experts</h1>
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January 21, 2016 </div>
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<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
The automotive rules of origin in the Trans-Pacific Partnership (TPP) are most likely to hurt auto parts suppliers that are furthest removed from the finished vehicle or producers of materials that are less complex, easily shipped and face low-cost competition
from Asia, according to industry, congressional and academic experts.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
This is because the TPP auto rules of origin give North American producers closer to the finished vehicle the flexibility to buy a majority of their materials from low-cost suppliers in non-TPP countries such as China and still qualify for tariff benefits under
the agreement, these experts said.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
That could prompt these companies to source more of these less complex inputs from non-TPP countries instead of buying them from U.S. producers. Some experts cited
<b><u>steel and tires</u> as examples of cost-sensitive and relatively non-complex inputs whose producers in the U.S. would likely be hurt by the lower TPP regional value content th</b>resholds.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
U.S. steel producers are already facing a flood of imports, fueled largely by Chinese overcapacity. In addition, China over the past decade has emerged as a major supplier of auto parts to both the U.S. and Japan, and its share of those markets continues to
grow for most products, according to data compiled by Harvard Law School Professor Mark Wu.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
China is the biggest supplier of brakes and wheels to the U.S. and Japan, and is also the largest supplier of auto body parts, airbags and miscellaneous parts to the Japanese market, the data show.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
The TPP requires that a vehicle must contain at least 45 percent regional content under the "net cost" method to qualify for tariff cuts, while auto parts must contain either 35, 40 or 45 percent regional value content (RVC), depending on the product. The 45
percent RVC applies to some of the most sensitive items such as engines and transmissions.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
In addition, the TPP rules of origin chapter contains an alternative methodology that provides additional flexibility in how these thresholds are calculated. Some critics including Ways & Means Democratic staff argue that the alternative methodology for qualifying
vehicles and auto parts under in TPP has the impact of further weakening the RVC thresholds included in the agreement.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
Most sources agree that the TPP rules of origin are on the whole weaker than those in the North American Free Trade Agreement (NAFTA) that require 62.5 percent regional content for vehicles and major auto parts. But advocates of the TPP automotive rules of
origin insist that is not the case.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
<b style="margin: 0px; padding: 0px; border: 0px;">This potential impact of the TPP rules is highlighted in a Jan. 8 report on the TPP auto provisions </b>prepared by Democratic staff for the House Ways & Means Committee, as well as testimony offered by Wu
at Jan. 11 forum on the same topic. The forum was convened by Ways & Means Ranking Member Sander Levin (D-MI) and Sen. Sherrod Brown (D-OH).</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
The minority staff report noted that an engine producer under TPP will have the flexibility to source parts from outside the region while still meeting the 45 percent regional value content (RVC) threshold, which would not be possible under the more stringent
NAFTA rules.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
"By contrast, the engine parts suppliers, and their suppliers, have increasing exposure, precisely because the engine producer has the additional flexibility to source from outside the region. Thus, the more remote the parts supplier is from the finished vehicle,
the more risk that the supplier loses the advantage he currently enjoys under NAFTA," the staff report said.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
Wu offered a similar assessment in his testimony, saying the impact of the TPP rules on U.S. auto parts makers would depend on the complexity of the good. "If you have a Chinese competitor and there is not a difference here in terms of the quality and … sophistication
here, you're apt to be substituted out," he said. "On the other hand, 45 percent of this still needs to be regional value content within TPP, so if you're a relatively sophisticated components maker at the top end of the supply chain and so forth, you [have]
less of a risk."</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
<b style="margin: 0px; padding: 0px; border: 0px;">Motor & Equipment Manufacturers Association (MEMA) Senior Vice President Ann Wilson said this week </b>that the impact of the TPP rules of origin on U.S. auto parts producers would vary depending on what they
make, whether it can be easily shipped, who their customers are and who their competitors are. In doing so, she signaled that some MEMA members could be hurt by the TPP.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
In a Jan. 20 interview, Wilson said MEMA members who are small suppliers have expressed worries about the TPP rules of origin, but have not flagged any other parts of the agreement. These worries were implicit in the statement MEMA released on Jan. 19 announcing
its support for the TPP deal.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
It praised the TPP on the grounds that it would further open global markets to U.S. auto parts suppliers, but also said "MEMA is concerned the TPP may not provide adequate long-term protections for small, regional U.S. suppliers that provide employment in all
50 states."</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
But Wilson stressed that the statement in support of TPP was a consensus position that was approved by MEMA's board of directors, which contains a cross section of the association's membership.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
MEMA's Canadian counterpart, the Automotive Parts Manufacturers Association (APMA), has also acknowledged the varying effects that the TPP rules of origin will have on its membership.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
In a statement issued on Oct. 5 after the TPP negotiations were concluded, APMA President Flavio Volpe said that the TPP will likely open up opportunities for large Canadian suppliers with multinational footprints and access to mobile capital.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
"On the other hand, small and medium sized suppliers to Canada's vehicle assembly supply chain will face new competitive pressure from large, multinational firms from TPP countries and further abroad," he said.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
<b style="margin: 0px; padding: 0px; border: 0px;">The Office of the U.S. Trade Representative declined to respond on the record to claims that </b>the TPP automotive rules of origin are weaker than NAFTA and could put some companies and jobs in the United
States at risk.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
But supporters of the TPP auto rules of origin argue that they are comparable to NAFTA, once the differences in approaches between the two agreements are taken into account. Specifically, these supporters point to the fact that NAFTA including a so-called "tracing
list" while the TPP does not.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
Items on the tracing list that are imported from outside the NAFTA region retain their origin throughout the supply chain. On the other hand, any items not on the tracing list are considered to have originated in the NAFTA region, even if they came from third
countries like China.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
Supporters of the TPP rules of origin argue that changes in vehicle content composition, especially the greater use of electronics in vehicles and parts, have meant that the percentage of a finished vehicle's parts not included on the tracing list has increased
since NAFTA went into force in 1994. As a result, the actual amount of NAFTA content has been lower than the nominal 62.5 percent, and may continue to fall, they say.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
But critics point out that the TPP regional value content threshold of 45 percent for finished vehicles is lower than the NAFTA number even after removing the effects of the tracing list. For instance, U.S. steel industry representatives serving on the Industry
Trade Advisory Committee for their sector (ITAC-12) said the actual RVC of a NAFTA vehicle without the tracing list could be as low as in the mid-50 percent range.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
The Ways and Means Democratic staff report is more specific, saying it appears USTR has indicated that the number may be 53 percent. "Thus, the TPP rule (45 percent net cost) is weaker than the NAFTA rule (no lower than 53 percent net cost, when adjusted for
more of an apples-to-apples comparison)," the report said.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
The tracing list was included in NAFTA at the behest of U.S. auto companies at the height of tensions with Japan over that country's large automotive trade surplus with the U.S. But NAFTA auto producers no longer support the tracing requirement they themselves
developed because they found compliance too burdensome.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
Levin highlighted the fact that USTR has been reluctant to defend the TPP rules of origin publicly, telling reporters after the Jan. 11 forum that he and his staff had contacted USTR to get an official to testify or at least recommend a witness who would support
the TPP auto rules. He urged reporters to press for a response to Wu's testimony on the impact the TPP rules of origin would have on the U.S. auto supply chain.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
<b style="margin: 0px; padding: 0px; border: 0px;">The alternative methodology that can be combined with the RVC allows certain materials </b>that go into auto parts or a vehicle to qualify as originating if certain production processes occur in the TPP region.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
Supporters say this alternative methodology is optional and does not weaken the thresholds. They argue that the processes were selected to ensure that the work done in the TPP country was substantial and justified a part's designation as originating. In addition,
they note that this alternative methodology is similar to the "process" rule of origin used in TPP for products like chemicals.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
They also downplay the impact that the RVCs for auto parts will have by noting that previous free trade agreements have allowed companies an alternative option to qualify auto parts without using the RVC. This alternative option is to show that inputs were
substantially transformed in the free trade area into a finished auto part.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
These supporters argue that it is generally possible to demonstrate such a transformation, so the RVCs are less relevant in the context of auto parts.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
The tracing list was included in NAFTA to avoid the problem of "rolling up" that emerged under the U.S.-Canada free trade agreement. Rolling up occurs when an auto part produced within the free trade region includes some amount of non-regional content but still
meets its relevant rule of origin. When that auto part is then incorporated into the vehicle, 100 percent of its value is counted as originating, masking the non-originating content.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
The industry associations representing vehicle manufacturers from the U.S., Mexico and Canada laid out their proposal for a TPP auto rule of origin without tracing in a November 2013 letter to the trade ministers of all three countries.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
"Our experience with tracing under the North American Free Trade Agreement (NAFTA) (the first and last FTA to have this rule) has shown that it is in some cases ineffective in achieving its goal of forcing more originating content," they wrote, according to
a copy of the letter obtained by <i style="margin: 0px; padding: 0px; border: 0px;">Inside U.S. Trade</i>.</p>
<p style="margin-right: 0px; margin-left: 0px; padding: 0px 0px 15px; border: 0px;">
The associations proposed an RVC for autos and light trucks that would begin at 35 percent under net cost and increase to 50 percent over a 10-year period. <i style="margin: 0px; padding: 0px; border: 0px;">-- Matthew Schewel</i></p>
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