Brett Fortnam of Inside U.S. Trade reports the following:
The U.S. and Mexico have agreed to subject autos that do not meet a modernized North American Free Trade Agreement rule of origin to a 2.5 percent tariff if they are made at an existing manufacturing facility, industry sources said -- meaning non-conforming autos made at new plants would be hit by Section 232 tariffs on auto imports if the Trump administration imposed them.
In bilateral talks with Mexico in recent weeks, the U.S. demanded that non-conforming autos be subject to a tariff higher than the 2.5 percent tariff rate faced today by autos not imported under a trade agreement. The Trump administration would have to increase its most-favored nation tariff for autos before a tariff higher than 2.5 could take effect. The Trump administration has used Section 232 to exceed its MFN tariffs on steel and aluminum. Other WTO members have charged that the Trump administration's use of Section 232 to impose steel and aluminum tariffs does not conform to WTO rules.
Sources said the Trump administration appears to be making the NAFTA deal with a larger policy motive in mind, which is why there are provisions that would allow non-conforming autos to face tariffs above 2.5 percent. Two sources cited the Section 232 investigation the Commerce Department is conducting into the national security implications of auto and auto-parts imports as the likely motive behind the provision.
Auto industry sources also said the U.S. and Mexico agreed to a number of changes to the auto rule of origin in NAFTA. The rule would require that 75 percent of a vehicle's content to come from North America, and that 70 percent of steel, aluminum and glass used in autos be sourced from North America. The current NAFTA rule says 62.5 percent of an auto must be sourced from North America to receive duty-free treatment. The overall regional value content requirement will be phased in over three years, according to one industry source.
Additionally, the U.S. and Mexico agreed on a labor wage provision requiring that 40 percent of a passenger vehicle's final assembly be completed by workers making at least the North American average wage of $16 per hour. That threshold would be 45 percent for light trucks. Salaries for workers engaged in research and development, marketing and sales could account for up to 15 percent of the labor wage requirement for passenger vehicles and 20 percent for light trucks.
I can imagine some clarifications may come later, but I have a number of questions about the deal described above (some of which are hinted at in the rest of the article).
First, what impact would these new rules have on existing car production in North America? How costly will it be for car makers to comply? It seems like we should have detailed information on this, in order to evaluate the impact of this change. When the ITC does its report on the new NAFTA, it should consider this issue carefully.
Second, how much does the impact vary by producer and region? Will there be some producers who support these changes, and some who oppose them? How will that play out in terms of the politics of support for a new NAFTA? For example, if German, Japanese, and Korean car makers in the South have the most trouble meeting these requirements, some members of Congress from that region may have objections.
With regard to the new Mexican car factories that would be subject to above-MFN tariffs, when are these factories expected to come into operation? Do people really expect Section 232 tariffs to be around for long enough to apply to those imports? Or is the idea to revise the U.S. MFN rate at the WTO, so that there is a permanently higher tariff?
And finally, does the Trump administration really think higher priced cars are a winning political strategy?
