The Rules of Origin of NAFTA
One of the top priorities of the Trump administration regarding the negotiation of an updated North American Free Trade Agreement between the United States, Canada, and Mexico concerns the formulation of more restrictive rules of origin of NAFTA.
RULES OF ORIGIN: WHAT ARE THEY?
“Rules of origin are guidelines that delineate the regional value share and/or transformation that occur to assure that the items that are imported from Mexico and Canada are actually are products of the countries that signatories to the treaty.
THE IMPORTANCE OF THE RULES OF ORIGIN OF NAFTA
It is important that the NAFTA rules of origin that are currently in place are the product of negotiations that took place in the early 1990s, and, according to US Secretary of Commerce, Wilbur Ross, need tightening. He asserts that this is so “because there are holes in them by which countries that are not a party to the agreement benefit.” He also explained that the “loose” NAFTA Rules of Origin have had the effect of causing job loss in the US automotive sector.
Although the current position of the US government is that the rules of origin of the NAFTA require a renegotiation and tightening in order to restrict duty-free benefits in trade to commerce between the three nations, some argue, however, that this change will inevitably result in higher costs for producers and an inflation of product prices for consumers. They assert that, to the contrary, a relaxing the provisions of the treaty that govern content would promote greater global economic efficiencies, and would have the opposite effect. Others contend that a stricter imposition of the rules “transfers protection of the final product onto the manufactured inputs that are used to produce it.” They argue that tightening of the NAFTA rules of origin would be to exercise protectionism. Furthermore, stricter rules of origin are often enacted to shield some industries and result in economic and product distortions.
Presently, the rules of origin are defined out on a product-specific basis in the more than 300 pages of Chapter 401 of the NAFTA. Trade professionals contend that they are voluminous and complicated. They also believe that a positive reform and retooling of the NAFTA rules of origin should create a single, “lower regional value content threshold that can be applied uniformly across products”. This would have the effect of lowering costs for consumers and producers of items imported and exported in the NAFTA region, and would also reduce costs associated with the administration that are required to document origin.
THE AUTOMOTIVE INDUSTRY AND THE RULES OF ORIGIN OF NAFTA
The most visible area in which the United States negotiators wish to address the issue of tightening the NAFTA rules of origin is the automotive sector. Currently, it is mandated that, in order to be deemed a North America originating product, sixty-two and a half percent of a vehicle’s value must be the result of NAFTA country inputs. According to a United States Department of Commerce analysis, since the early days of the NAFTA in 1995, automotive value-added content from non-NAFTA countries has increased from 13.2% to 29.5%. “United States Secretary of Commerce, Wilbur Ross, has frequently stated that the NAFTA rules of origin are a “back door” for Chinese auto parts to enter the United States through Mexico and Canada and that the trade pact’s benefits need to be enjoyed only by its members.”
While officials such as the United States Secretary of Commerce see the NAFTA rules as they are defined at present as a negative, others point to the recent growth in the country’s automotive industry as proof that they should be kept intact as they are. Statistics demonstrate that in 2016, 1000 more vehicles were manufactured in the United States that were produced in the year preceding the implementation of the North American Free Trade Agreement. Also, since the beginning of the North American Free Trade Agreement, the US has doubled its auto industry exports, while construction of new plants has taken place in five separate states. Additionally, plant expansions have recently taken place in Indiana, Kansas, Kentucky, Michigan, Missouri, and Ohio. Furthermore, within the last 30 days, both Mazda and Toyota have announced that they will construct a US assembly plant, while Honda, Ford, BMW, Mercedes-Benz, and Volvo have announced US expansions. Also, over the course of the past year, GM has invested $US 3 million in domestic production centers, while Fiat-Chrysler has recently made commitments for US $9.6 billion in future investments. Some industry watchers believe that a change in the NAFTA rules of origin to a percentage of higher than the current 62.5% for the automotive industry could prove to be deleterious to future further investment and job creation in the nation’s industry.
WILL MORE INVESTMENT IN MEXICO BE THE RESULT OF STRICTER NAFTA RULES OF ORIGIN?
In Mexico, there are those, including Francisco de Rosenzweig, of the law firm White & Case, that believe that tighter rules of origin for the automotive industry will result in the migration of more of the supply chain to Mexico. Auto suppliers that establish new facilities south of the border will the beneficiaries of both duty-free treatment of their products within the North American Free Trade Agreement region, as well as lower costs of labor.
The rules of origin of NAFTA are critical to the functioning of the NAFTA as negotiated by the three parties to the agreement. They have been put into place to make sure that items traded on a duty-free basis within the block of are products of the United States, Canada, and Mexico. The position taken by the United States as articulated by Secretary of Commerce, Wilbur Ross, is that rules should be made stricter. He argues that doing so will limit the ability of manufacturers that are foreign to the NAFTA zone to benefit from the treaty. They also opine that a tighter set of origin rules will protect US jobs and domestic automotive industry investment.
Opponents to the imposition of new and tighter rules of origin of NAFTA of the belief that making content requirements more onerous will result in higher costs of production of goods. These costs will ultimately be passed down to consumers. Global economic distortions and inefficiencies will be the result.