One of the Trump administration’s biggest goals in renegotiating the North American Free Trade Agreement — a sweeping pact that has more closely knit together the economies of Mexico, Canada and the United States for nearly 25 years — is to make sure that the products that benefit most from this pact are actually made in North America.
That might sound obvious. But for years, some critics have alleged that low-cost components from other places — including China — were sneaking in and becoming part of other Made-in-North-America products that would then qualify for advantages under NAFTA.
You may have heard of some of these critics. They include President Trump and his commerce secretary, Wilbur Ross.
“It was a silly idea to let a lot of outside stuff in,” Ross said in an interview on CNBC in April. “The whole idea of a trade deal is to build a fence around participants inside and give them an advantage over the outside. So there's a conceptual flaw in that, one of many conceptual flaws in NAFTA.”
Trump, Ross and others have talked about trying to raise the amount of North American-content that a product has to contain in order to qualify for NAFTA — what trade experts call “rules of origin” — in the NAFTA negotiations that start Aug. 16. Under the pact currently, for example, at least 62.5 percent of the total value of the components in a car have to come from within North America in order for that automobile to move across North American borders tax free.
Some groups, including the United Automobile Workers, believe this threshold should be higher. They argue that lax rules are letting companies source products that sidestep labor and environmental standards, and that using more parts that are made in North America will strengthen regional business and add jobs.
In remarks Wednesday morning at the opening of NAFTA talks, chief trade negotiator Robert Lighthizer confirmed that raising this threshold would be a major goal. "Rules of origin, particularly on autos and auto parts, must require higher NAFTA content, and substantial U.S. content," Lighthizer said.
But not everyone agrees. The idea of raising this threshold for made-in-North-America components faces fierce opposition from industry and some economists, who say that these requirements are already high, and that raising them further could push manufacturing out of North America altogether.
That's because sourcing components from within North America can be expensive. And as the threshold for North American content climbs, so will the cost of producing goods on the continent. That could ultimately make it harder for U.S. carmakers to compete with rivals in Asia and Europe and export their products abroad.
At a certain point, companies may decide it's cheaper to make the car elsewhere and merely pay the tax required to import cars into the United States — which is relatively low, at 2.5 percent.
Much of the debate in the upcoming NAFTA negotiations may center on exactly where this inflection point is: how much North American content the free trade agreement can require before companies move their manufacturing out of North America altogether.
It's also unclear whether the Trump administration will seek to introduce a threshold for content made in the United States, not just in North America. In the goals the Trump administration released for its NAFTA negotiations, it mentioned updating and strengthening the rules of origin, as necessary, to ensure the pact's benefits go to products made in North America and the United States. Such a requirement to include more materials from the United States could further complicate life for manufacturers and raise their costs of production, trade experts and industry executives said.
Raising the rules of origin appeared to be one of the Trump administration's primary goals in renegotiating NAFTA. But the fight against this could end up being fierce. People as disparate as economist Caroline Freund, U.S. Chamber of Commerce official John Murphy and Mexican Foreign Minister Luis Videgaray have gone on the record to oppose the proposal.
So has Matt Blunt, who represents Chrysler, General Motors and Ford at the American Automotive Policy Council.
“We would also urge caution with changes,” Blunt said. “You know, there are some potential negative ramifications to a rule of origin that’s too high” — including increasing the cost of vehicles in the United States in a way that lowers sales and ultimately employment.