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October 19, 2017 3:15 PM, EDT

As NAFTA Talks Stall, Trade Concerns Grow

Mexican, Canadian Delegates Alarmed by Hard-Line U.S. Stance
NAFTA negotiators at a press conference Villarreal (left) speaks while Freeland (center) listens during a press conference on NAFTA negotiations. (David Kawai/Bloomberg News)

Talks aimed at renegotiating terms of the North American Free Trade Agreement appear to be stalled over demands from the United States that would, among other things, require a higher percentage of car parts to be sourced in the U.S.

As the fourth round of NAFTA talks wrapped up in Washington, D.C., on Oct. 17, U.S. Trade Representative Robert Lighthizer, Mexican Economy Minister Ildefonso Guajardo Villarreal and Canadian Foreign Minister Chrystia Freeland abandoned a target of December for completing work on a new accord as representatives of Canada and Mexico rejected what they see as hard-line U.S. proposals.

The United States is seeking changes that would shrink the size of its trade deficit with Mexico and provide a boost to domestic manufacturing, although many industry analysts say moving production to the U.S. would seriously disrupt supply chains and make American products less competitive in the world.

Bob Costello, chief economist for American Trucking Associations, is one who is skeptical of the approach of the Trump administration, saying it is unlikely that goods made in Mexico would come to the U.S.

“It wouldn’t,” he said. “It would be made somewhere else, like China, which would then hurt U.S. trucking.”

Costello

Trucking generates $6 billion in revenue from goods that are exchanged among the United States, Mexico and Canada each year and an estimated 30,000 drivers and other transportation workers are employed because of trade between the three countries, according to Costello.

“When something is made in North America, there are usually many trucking moves to go along with the production process,” Costello explained. “If it is made in China, that wouldn’t happen. North America needs to compete with other trade blocks, like Asia, South America and Europe, and to do that, we need a solid, improved NAFTA.”

A report by the Boston Consulting Group for the Motor Equipment Manufacturers Association — which represents motor vehicle parts manufacturers and remanufacturers — predicts the U.S. will lose 50,000 jobs if the country pulls out of NAFTA, triggering higher tariffs for shipping products to Mexico and Canada. The U.S. auto parts industry employs about 870,000 workers.

U.S. negotiators are pushing for higher “rules of origin” for auto parts. The U.S. currently allows any vehicle sold in the country to avoid tariffs if 62.5% of the production is conducted in the United States. The Trump administration is pushing to boost that to 85% and add a 50% U.S. origin requirement that would mandate that any vehicles produced in a NAFTA country have 50% of those components produced in the U.S.

U.S.-made machinery is transported to a mine site across the border in Mexico. (Bill Hay International)

Bruce Hirsch, a principal of Tailwind Global Strategies, said annual car production in America has increased by more than 1 million vehicles compared with the year before NAFTA went into effect in 1994.

If the U.S. moves to a 85% requirement, it would become more profitable for U.S. automakers to produce vehicles overseas — perhaps in China — and pay the tariff, currently between 2.5% and 5%, than pay the higher production costs in America, Hirsch said.

Cody Lusk, president of the American International Automobile Dealers Association, argued that NAFTA demands by the U.S. will hurt consumers by causing prices to increase.

“The auto industry is one of NAFTA’s biggest success stories and helped international nameplate dealers to sell 8.4 million vehicles to American consumers last year, resulting in 59% of total U.S. retail vehicle sales,” Lusk said. “While NAFTA modernization is important, we urge caution in considering the jobs that might be lost and the prices American consumers may incur as the result of changes to key aspects of the agreement.”

Tom VanMouwerik, owner of Bill Hay International, a San Diego-based customs brokerage firm that specializes in handling shipments between the U.S. and Mexico, said he is concerned about what appears to be the growing political influence of opponents of free trade.

“We deal with a lot of machinery into Mexico that is manufactured in the United States,” he said. “People really don’t take notice of how much we export. Canada and Mexico are the two leading markets for U.S. goods. We should work as partners as opposed to what appears to be an adversarial approach.”

VanMouwerik, who has owned Bill Hay International for the past nine years, said he is watching the value of the Mexican peso, which dropped sharply after the election of Donald Trump and could tumble again if the United States pulls out of NAFTA.

In his closing statement after the latest round of negotiations, Lighthizer sounded a pessimistic tone about the status of talks.

“I am surprised and disappointed by the resistance to change from our negotiating partners,” Lighthizer said. “NAFTA is an investment agreement and it is unreasonable to expect that the United States will continue to encourage and guarantee U.S. companies to invest in Mexico and Canada primarily for export to the United States.”

The next meeting is set for Nov. 17-21 in Mexico.