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Trump team readies for NAFTA fight over making goods in America

Employees work on the Honda Civic production line at the automaker's Dongfeng Honda factory in Wuhan, China.
STR | AFP | Getty Images
Employees work on the Honda Civic production line at the automaker's Dongfeng Honda factory in Wuhan, China.

As negotiators from Canada, Mexico and the United States head to Ottawa this weekend for a third round of North American Free Trade Agreement talks, the Trump administration is releasing data it says proves the playing field is tilted against American manufacturers.

A Commerce Department report released on Friday contains data showing the United States is playing a diminished role in manufacturing products that are bought and sold around the continent. Meanwhile, countries outside of North America — like China — are capitalizing on Nafta's weak rules and benefiting from the trade agreement, the report said.

The administration's report is expected to dominate Nafta discussions over so-called "rules of origin." Those rules govern how much of a good must be produced in North America to qualify for Nafta's zero tariffs on many products.

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The United States is expected to push for raising those limits. Negotiators also appear poised to argue for a new requirement on how much of those goods need to be made in the United States.

Current thresholds vary for different products, but are aimed at ensuring that North American workers receive most of Nafta's benefits.

The rules for automobiles, for example, require 62.5 percent of the value of a car must be manufactured in Canada, Mexico or the United States for the automobile to move between the countries, duty-free. That means a car could source up to 37.5 percent of its value from a country like China and still be eligible for preferential treatment under Nafta.

These requirements have become one of the biggest areas of conflict in the Nafta debate, particularly for American negotiators who are seeking to fulfill one of President Trump's biggest campaign promises: Remaking trade agreements to revive American manufacturing.

Since 1994, Nafta has knit the North American economy together by lowering the barriers that companies face when they ship products across borders. While most studies suggest the deal has had a modest overall effect on the United States economy, it has encouraged companies to reorganize their supply chains by moving lower-cost operations to Mexico. And it has become a huge source of controversy, with Mr. Trump describing it as the "worst trade deal ever made."

The president and his advisers argue that the pact has created a "back door" for foreign products. They say that the deal currently allows raw materials or components to be shipped into North America from elsewhere and incorporated into manufactured goods, like cars or electronics, that can then be shipped among Canada, Mexico and the United States without paying import duties.

In its report, the Commerce Department said that the share of American-produced content in manufactured goods imported by the United States from Mexico fell from 26 percent in 1995, shortly after Nafta was signed into law, to 16 percent in 2011. The share of United States content in imports from Canada, meanwhile, fell from 21 percent in 1995 to 15 percent in 2011. Imports from Asia, and especially China, helped make up the difference.

The same trend was visible in motor vehicles and, to a lesser extent, basic metals like steel and aluminum, the report said.

The report does not mention any economic factors outside of the United States. In the same time period, Chinese manufacturing and trade surged, as the country modernized and joined the World Trade Organization in 2001.

"We cannot forget that the point of a free-trade agreement is to advantage those within the agreement — not to help outsiders," Commerce Secretary Wilbur Ross wrote in an accompanying op-ed that was published on Thursday by The Washington Post. "Instead, Nafta has provided entry into a bigger market for outside countries, and the United States is paying the price."

On Saturday, negotiators from the three Nafta countries will gather in Ottawa, the Canadian capital, to begin five days of talks. Rules of origin are expected to be discussed, and potentially also labor rights, government purchasing guidelines and methods of resolving trade disputes.

The Trump administration may have a tough time convincing Canadian and Mexican negotiators, who have said they are not in favor of country-specific rules of origin. And it could also face opposition within the United States.

Some groups, like the United Steelworkers Union, say the administration is right to fight for higher levels of American-made goods. Big businesses, however, mostly disagree. Groups like the U.S. Chamber of Commerce and the National Association of Manufacturers argue that Nafta already has some of the highest rules of origin requirements of any trade deal.

Among their concerns is that raising thresholds to higher levels could ultimately push manufacturing out of the United States altogether. As the thresholds for how much content must be made in America rise, it becomes more expensive and complicated for companies to source their parts within North America.

At some point, a company may decide it is more cost-effective to produce cars in China and simply pay a penalty to export the entire vehicle to the United States. For imported cars, the tariff is relatively low, at 2.5 percent – suggesting the administration may not have that much space to raise rules of origin before businesses just start paying the tariff instead.