NAFTA negotiations will begin soon in Washington, D.C., and the number one issue for automakers is the rules of origin for car parts. The rules of origin clause specify the composition of vehicle parts necessary to qualify as a domestic vehicle made in North America. This will determine the duty-free status of cars and trucks as they cross the border. Any change to the rules of origin will affect millions of vehicles in all three countries.
The United States wants to reduce the $60 billion trade deficit that they have with Mexico and, under President Trump, repatriate manufacturing jobs to America. NAFTA currently calls for at least 62.5% of a vehicle’s content value, i.e. the parts in each of the cars, must be from Mexico, Canada, or the United States to make it qualify for no cross border duties. There are indications that the United States wants to increase that number dramatically to reduce the number of components coming from Asia.
Industry observers are worried because NAFTA has guaranteed a fine economic balance over the first 25 years of the trading agreement. While most agree that it is necessary to update the deal, out of all global trade agreements NAFTA has the highest regional content threshold.
One of the potential downsides that might occur if negotiators raise regional content value is higher administrative costs for manufacturers that may simply opt to pay tariffs to import vehicles, which are incredibly low for most favored nations. In the case of vehicles, tariffs would end up being about 2.5%, and estimates peg that about 25% of all imports pay the tariffs versus dealing with NAFTA processing requirements. In this scenario, Trump might raise tariffs to goad domestic manufacturers, but other countries could then retaliate, sparking a potential trade war.
NAFTA negotiations will be very tricky, and one small change to part of it may have a huge impact on another part of the deal. Hopefully, the negotiators are working hard to find a reasonable and effective solution.