The United States and Mexico are considering changes to the auto chapter of the North American Free Trade Agreement (NAFTA) that would introduce new and more complex criteria regarding the North American content of assembled cars and trucks, according to Inside U.S. Trade. If implemented, these changes would raise the cost of cars and trucks produced in North America and possibly reduce the sale of cars assembled in North America, the opposite of the intended effect.
If this proposed change to NAFTA seems illogical and counterproductive, you're right. Raising the cost of producing a car or truck in North America is not a good recipe for commercial success. Foreign producers don't have to follow the convoluted NAFTA requirements to sell their cars in the US market; instead, US auto importers merely pay a 2.5 percent tariff—which doesn't require them to meet any domestic or regional content criteria. So if the proposed NAFTA content rules force North American automakers to switch to higher priced local suppliers, and the added cost is more than the current import tariff, NAFTA will actually benefit importers by giving them a price advantage over North American production.
The only way the NAFTA revision would not hurt US-based automakers is if the United States were to raise the cost of imported cars by imposing a stiff new tariff on imported cars from Europe, Japan, and South Korea above the maximum rate of 2.5 percent set by US obligations under the World Trade Organization (WTO). This could be done presumably by invoking the authority of Section 232 of the Trade Expansion Act of 1962 to restrict imports that threaten to impair US national security. Using Section 232 authority is the only way that US officials arguably can raise tariffs without violating the letter of WTO obligations and/or paying compensation to affected exporting nations.
Officials of auto exporting countries should thus expect US officials to threaten to impose additional auto tariffs of as much as 25 percent pursuant to the current Section 232 case on autos, if exporters don't accept "voluntary" restraints on their shipments to the US market. With less competition in the US market, the higher cost of producing cars in North America under the proposed NAFTA rules could be passed on to US consumers without the risk of losing market share to imported autos. US officials deployed this tactic last spring when they used Section 232 tariffs on steel to coerce South Korea into accepting quotas that will reduce Korean steel exports to the United States by more than 30 percent. Look for US trade officials, when they meet in a few weeks with their European and Japanese counterparts, to threaten new US import restrictions under Section 232 if those countries don't agree to rebalance auto trade. It's the logical follow-up to the proposed NAFTA deal on autos.
Indeed, the prospective revised NAFTA rules could have an even greater impact on truck production in Mexico and exports of those vehicles to the US market. In 2017, Mexico exported about $23 billion of trucks to the United States (under Harmonized System code 8704). Because of NAFTA tariff preferences, those products did not have to pay the US truck tariff of 25 percent. But if Mexican truck assemblers cannot meet the new origin rules, they will be assessed at the 25 percent tariff rate—and few companies have been able to incur that cost and remain competitive in the US market.
Gary Clyde Hufbauer adds:
Press reports say that the United States and Mexico are about to strike a deal that will gouge American auto buyers in 2019 and beyond. Stripped to its essentials, the deal will put a 25 percent US tariff on autos or parts produced by any new or expanded Mexican auto plants. Price tags on those autos will shoot up by $5,000 or more. Firms that escape the new tariff—notably the Detroit Three, General Motors, Ford, and Chrysler—will feel less competition from Mexico and, as time goes on, will raise their prices accordingly.
This deal cannot be good for American households. Congress must hold hearings, with competent and independent expert witnesses, to explain what the deal means to car buyers. The Trump administration may claim that the tariff will create tens of thousands of new American jobs. Congress should closely examine such assertions. At a time of full employment, tens of thousands of workers are not looking for auto jobs. Once the facts are aired, it's hard to see why Congress would ratify such a bad deal.
The deal is as bad for Mexican workers as it is for American households. The only reason President-elect Andres Manuel Lopez Obrador (AMLO) would sign such a deal is to escape fresh punishment from the Trump administration. With this deal, Trump may again demonstrate—as he did with Korea—that he can force weak foreign partners to accept bad terms.
But the US Constitution gives Congress the final word on trade. Congress should exercise its power to scrap Trump's deal and spare American households.