Canada expected to make NAFTA auto proposal this week

Canada is expected to propose that content percentages under the revised trade deal account for “a whole host of things” not directly related to manufacturing, according to Jerry Dias, president of Unifor, a union representing Canadian auto workers.    Canadian negotiators on Friday are expected to propose that automobile regional value content calculations under the North American Free Trade Agreement (NAFTA) account for non-production activities like design and research, in compromise to a United States proposal for an 85 percent North American content requirement and a 50 percent U.S. content requirement, according to sources close to ongoing talks.
   NAFTA parties are currently meeting in Montreal for the sixth round of talks, which started Tuesday and will end Sunday.
   The pact’s automotive content requirements generally mandate that 62.5 percent of a car’s physical components originate in Mexico, Canada, or the U.S., and currently apply only to part types used in assembly of cars at the time the agreement was negotiated in the early 1990s.
   Canada is working to find a NAFTA framework that “everyone can build on and live with,” including with regard to automobiles, said cleared NAFTA adviser Eric Miller, president of trade consultancy Rideau Potomac Strategy Group.
   Canada’s proposal could suggest inclusion of newer car components, such as backup cameras and modern electronics, in content percentage calculations, said Jerry Dias, a Canadian government adviser for NAFTA talks and president of Unifor, a union representing Canadian auto workers.
   Canada is expected to propose that content percentages under the deal account for “a whole host of things” not directly related to manufacturing, such as research and development, he said.
   A spokesperson for the government of Canada confirmed the country is “considering potential ideas” to “reinforce North American competitiveness” and “incentivize” automotive investment and research and development in the NAFTA region. “These will be discussed this week,” he said.
   After discussions with the country’s negotiating team, Dias believes Canada could settle for a North American content requirement higher than the existing threshold, but lower than the U.S. proposal’s figures, which Miller called “opening gamuts.”
   Canada is evaluating the “sweet spot” regional content percentage to propose, he said.
   It’s foreseeable that Canada proposes a 75 percent regional content requirement that would take into account more development operations – including non-manufacturing, intellectual property-related activities – as part of content valuation determinations, Miller said.
   “I believe we can increase the rules of origin in auto from…where they are,” Dias said. “I think the Canadian team has a pretty interesting proposal to maybe move things along, but that won’t happen until Friday.”
However, it’s not likely that Canada will agree to any form or figure of a single-country content requirement for the U.S., Dias said.
   Canada sees the U.S. domestic content requirement proposal as an “existential threat” to the Canadian auto sector, because “as a higher-cost producer, they fear that if production is going to move to the U.S., that it will be more likely, potentially, to move from Canada than it will be from Mexico, because wages are higher in Canada, and Canada tends to specialize in higher-cost, higher-value vehicles,” Miller said.

Separate Mexican Content Requirement? Dias posited that the U.S. and Canada should consider creating a two-country automotive rule of origin, saying that Mexico has the most auto workers, but only 8 percent of cars sold in North America are sold in the country.
   A binational 90 percent automotive content requirement for Canada and the U.S. paralleling a 10 percent Mexican content requirement would make sense given this fact, he said.
   “So, we’ve got a problem here,” he said. Canada is “the number one trading partner for thirty U.S. states. So our relationship with the United States is much different” than the two countries’ trade relationships with Mexico.

Mexican NAFTA Exports Writ Large. Automobiles compose just one of the leading export sectors in Mexico ostensibly under close U.S. scrutiny.
   At the close of the fourth negotiating round, U.S. Trade Representative Robert Lighthizer criticized Mexico’s export policies, saying their manufacturing policy “that is largely dependent on exports to the United States without balance cannot long continue.”
   Mexico liberalized about 7,000 tariff lines around 2001, when the country’s federal maquiladora program was officially terminated pursuant to NAFTA, Miller noted.
   While factories created under the program still exist, “as a legal fact, they do not exist under NAFTA in the same way they are imagined to exist,” Miller said. “They may have [free trade] zones for tax purposes, but they do not have zones for trade purposes.”
   He questioned how those manufacturing operations are qualitatively different from the U.S. foreign-trade zone program, which comprises approximately 800 production/storage facilities across all 50 states and allows companies to claim tax benefits.
   Miller asked, “How is that any different?”
   Mexico’s manufacturing efficiency is largely attributable to large-scale reductions in the country’s most-favored-nation (MFN) tariff rates, and is hardly traceable to the existence of remaining factories, Miller said. The lower tariffs have made it much cheaper to import production inputs from World Trade Organization members that haven’t entered into free trade agreements with Mexico, he said.
   “Are you going to tell Mexico to raise their MFN duties in order to make themselves less competitive, somehow?”