The United States is presenting a quadruple-whammy demand on auto manufacturing at the NAFTA negotiations, including a strict “Made In America” requirement with virtually no grace period to give car companies time to adjust.
The proposal is viewed as a non-starter by virtually every party involved in automobile production: Canada, Mexico, U.S. industry and even labour groups were calling the proposal completely unattainable.
It’s one of the biggest issues of the talks and it’s sure to provoke a backlash on multiple fronts.
The U.S. negotiating team showed industry representatives their proposal to Canada and Mexico and it contained four ideas that would complicate auto production, several sources said Friday.
First, it requires all cars to include 85 per cent North American content to avoid a tariff, up from the current 62.5 per cent; 50 per cent of a car’s content would have to come from the U.S.; and it would toughen the way content is calculated, with a list upgraded to include parts that didn’t exist in 1994 when NAFTA was originally implemented.
A fourth irritant is the minuscule proposed phase-in period.
Automakers would have one year to comply with the American-made quota and two years to comply with the overall North American content requirement under the proposal, which is a radical departure not only in substance but also in the timing of phase-in periods normally included in trade agreements.
The demands are deemed so impractical the talk in the hallways at the conference site revolves around which of two objectives the Americans are trying to achieve: Sabotage the talks, or shock other parties into concessions.
“It just doesn’t make sense from a business perspective.”
— Flavio Volpe, Automotive Parts Manufacturers’ Association
A Canadian auto-parts representative said he tends toward the latter.
“My instinct is this is, ‘Art of the Deal,”’ said Flavio Volpe. “There are those who think these are poison pills designed … to get the partners to leave the table.”
The proposal came as the U.S. made its first significant move on dairy, a traditional sticking point with Canada. Several insiders said Friday the U.S. has asked Canada to scrap its special classifications benefiting domestic producers for things like diafiltered cheese-making products.
The U.S. also wants a veto power over future Canadian classification changes.
What’s already proposed would lead to changes in Canada’s supply-management system. The U.S. has not yet made any explicit request for a percentage of Canada’s protected dairy market. But that request could still come at any time.
Earlier U.S. demands include a termination clause that would cancel NAFTA after five years, unless all parties agree to extend it, and a Buy American rule that would make it far more difficult for non-U.S. companies to bid for public projects.
The auto proposal is so controversial, organizations that are normally rivals are allied against it. Volpe’s Automotive Parts Manufacturers’ Association says it could create a perverse incentive for producers to leave the continent.
Their argument is that it’s far easier to ignore the NAFTA rules and simply pay the U.S. 2.5 per cent import tariff: “It’s not good for the Americans,” Volpe said. “It just doesn’t make sense from a business perspective.”
“This is a deal that is going nowhere very quickly.”
— Jerry Dias, Unifor
The union representing Canadian auto workers agrees.
Unifor’s Jerry Dias says the U.S. would never have the power to enforce the proposed changes because companies would just ignore it: “All this argument about 50 per cent, 70 per cent, 85 per cent, it means nothing as long as the U.S. has a 2.5 per cent tariff. It’s like the emperor with no clothes,” Dias said.
“They can yell, scream, threaten, then people say, ‘Okay, here – I’ll pay the 2.5 per cent’.”
He said it’s a moot point anyway because there’s no chance Canada or Mexico will ever agree to a NAFTA that looks like what the Americans are proposing.
“Get it out of your head. That’s never gonna happen,” Dias said. “This is a deal that is going nowhere very quickly.”
Scotiabank analysts agree the proposals would hurt their author.
Car companies would have an incentive to move production away from the U.S., and Canada, either to Asia or Mexico, and pay a tariff rather than deal with the rules being proposed by the U.S., said its deputy chief economist.
“If accepted, the U.S. (proposal) would be a pyrrhic victory,” said Brett House.
House called the proposal a poor solution to a non-existent problem. Growth in auto employment since the Great Recession has skyrocketed in the U.S. to six per cent a year and he said North American content is on the rise in cars produced in Canada and Mexico, contrary to figures being floated by U.S. Commerce Secretary Wilbur Ross.
“There’s no problem here to address,” he said.
One real problem, however, is stagnant wages: U.S. auto salaries have not seen an appreciable increase for years, according to data from the U.S. Bureau of Labor Statistics. Dias says that’s the problem everyone should be attacking – by increasing labour standards, especially in Mexico.