Economic Study: Changes to Auto Rules of Origin Are Unnecessary and Harmful

December 20th, 2017

Yesterday, Scotiabank Economics released a new study that refutes the U.S. proposal to tighten NAFTA’s rules of origin on vehicles. Scotiabank’s analysis shows that vehicles produced in Canada and Mexico are actually using more NAFTA content than those produced in the United States. This is in direct contrast to claims made by the U.S. Department of Commerce and the United States Trade Representative (USTR), who are both pushing for NAFTA rules of origin to be increased. As Scotiabank so aptly states,

“The US proposal to tighten NAFTA’s rules of origin on vehicles is an ill-conceived solution in search of a problem.”

In the fourth round of NAFTA renegotiations, the USTR tabled a proposal to raise the amount of NAFTA content in autos from 62.5% to 85% and require that 50% be U.S. domestic content. The USTR’s proposal is based on their belief that U.S. and NAFTA content shares in vehicles have decreased due to companies in Canada and Mexico allegedly sourcing components from Asian, principally Chinese, competitors.

However, through the analysis of current data, Scotiabank refuts this claim. The USTR based the rules of origin proposal on a study conducted by the U.S. Department of Commerce, but the data used in that study is statistically problematic. Firstly, the study is not current; it only analyzed data from 1995 to 2011. Secondly, numerous studies, including those conducted by the U.S. Department of Transportation and the National Highway Transportation Safety Administration, came to the opposite conclusion of the U.S. Department of Commerce.

Current statistics show that NAFTA-sourced content in Canadian and Mexican-assembled autos has actually increased from 2011 to 2017, even as local content shares in the U.S. have declined.

Between 2011 and 2017, 12 out of 16 Canadian-assembled models saw an increase in NAFTA content shares. Across all auto models, NAFTA content in Canada increased from 68% to 70%. The same can be said about vehicles assembled in Mexico. Between 2011 and 2017, 10 out of 12 Mexican-assembled models sold in the U.S. experienced an increase in NAFTA content shares. During this period, the NAFTA content share in Mexico increased from 71% to 74%. Notably, autos assembled by GM, Ford, and Fiat Chrysler in Mexico and Canada also experienced an increase North American content shares. For just the Detroit Three, NAFTA content shares rose from 73% to 80% in Canada and from 83% to 86% in Mexico.

The USTR’s rules of origin proposal is especially onerous due to the damage that it would cause the U.S. auto sector. The supply chains that have emerged in North America since NAFTA was enacted have given U.S. auto producers a competitive edge in the global market that would not be possible otherwise. In the last decade, U.S. vehicle exports have increased 3.1% annually and account for 9% of the global total. U.S. auto exports to Mexico and Canada have risen by nearly 5.7% a year over the past decade, more than double the amount of other manufactured goods exported to these nations.

Employment in the U.S. auto industry has also increased due to NAFTA. Since NAFTA was enacted, the U.S. auto industry now represents an astounding 8% of all U.S. manufacturing employment, up from 6.5% prior to 1994. However, since the 2008 recession, employment in the U.S. auto industry has increased by an average of 6% year over year. This is more than 5 times the growth in overall manufacturing employment during the same period.

The success of the U.S. auto industry in the past decade can largely be attributed to the supply chains that emerged post-NAFTA. By utilizing the advantages of Mexico, Canada, and the United States in the manufacturing process, U.S. automakers have been able to stay a step ahead of the global competition, resulting in more U.S. jobs and investment in U.S. communities. The USTR’s rules of origin proposal is not only irrational but also detrimental. By tampering with a proven system, the USTR risks putting North America’s global competitiveness on the chopping block. Ultimately, tightening the rules of origin for autos will only result in jobs losses and more foreign components entering North America.