I wouldn’t call the last few weeks in the Trump administration a respite, but, at least on the trade front, things have been quiet.
The relative silence has been broken, and President Donald Trump’s surrogates are back to saying really disturbing things about the economy. This time, about the auto industry.
On Friday, Commerce Secretary Wilbur Ross made the media rounds presenting his department’s newest study on one of the most contentious topic in North American Free Trade Agreement (NAFTA) negotiations — rules of origin.
Currently, a car or car parts can move tariff-free throughout the region as long as 62.5% of the parts were manufactured within NAFTA. If it doesn’t meet the 62.5% threshold, then a 2.5% tariff must be paid. Ross and many others in the Trump administration think that’s not enough. Their study shows US auto part usage declining within the region.
“More than 100% of the reason for the trade deficit is auto and auto parts, Ross said. “Without that there would actually be a surplus between US and its two NAFTA partners. So it’s a very, very important part of it. But the most shocking part… is that more and more of the content isn’t even from within NAFTA.”
If Ross had his druthers, 70% of parts would have to come from NAFTA nations, crowding out players like China which has grown its auto parts presence in the region to 5.8% in 2011 from a scant 0.3% in 1995.
Of course, trade experts see a few problems there.
First of all, restricting the parts manufacturers can buy could make everything more expensive.
“At the moment, manufacturers in the NAFTA region have some leeway under current rules to source parts inside or outside of the region, as they see fit, and still take advantage of the freer trade NAFTA allows,” said Lee Branstetter, an economist at Carnegie Mellon. “By forcing upon NAFTA supply chains a significantly higher local content requirement, Mr. Ross and his team will constrain business decisions, lower the efficiency and effectiveness of NAFTA based supply chains, and place U.S. goods created through NAFTA-based supply chains at a competitive disadvantage with foreign goods. I think it is very likely that this policy will destroy more U.S. manufacturing jobs than it creates.”
Then there’s the loophole issue. Some economists, like Caroline Freund of the Peterson Institute for Economics, think that raising the requirement to 70% could make it more attractive for companies to just pay the tariff. That would remove the incentive to meet the requirement entirely.
In short, this could backfire spectacularly.
Now all that aside, the automotive rules of origin point is already a messy one in NAFTA negotiations. Mexico’s economy minister, Ildefonso Guajardo, recently told the press that it’s one of the “elephants in the room” as the three countries discuss terms.
Mexican and Canadian politicians are facing pressure at home to fight hard too. The Trump administration has fostered little goodwill with either nation, and last month the president of the Mexican Automotive Industry Association (AMIA), Eduardo Solis, said that the rules of origin would not change.
“We have determined, along with our colleagues from the United States and Canada, that this rule of origin should be maintained as it is, knowing that it has succeeded in helping the three countries in the success we have had,” Solis told journalists during a press call.
Oh. Ross obviously didn’t get the memo. Of course, this entire debate is premised on the idea that the trade deficit between Mexico and the US (or any other country for that matter), is a bad thing. Really, it’s irrelevant.
“Wilbur Ross says that it is a bad thing that the US runs a trade deficit with Canada or Mexico in autos and auto parts, Branstetter said. “He says we must have balanced trade with these two nations in these goods categories. But there is no reason why any nation needs to run a surplus or balanced trade in particular categories of goods with particular trading partners.
“That is as senseless as a tire salesman insisting that he run balanced trade — in dental services — with his dentist,” he concluded. “What would we think of a tire salesman who refused to allow a dentist to fix his kids teeth unless the dentist allowed the tire salesman to fix his kid’s teeth? We’d think that tire salesman was idiotic and harmful to his own family.”
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