NAFTA Briefing: Review of current NAFTA proposals and potential impacts on the North American automotive industry
April 26th, 2018
Current proposed changes to NAFTA have potential to alter U.S. automotive and parts industries dramatically
ANN ARBOR, Mich., April 26, 2018 — The United States has proposed a range of sweeping changes to the rules of origin and the calculation of regional value content to qualify for North American Free Trade Agreement (NAFTA) preferences. The Center for Automotive Research (CAR) along with the Trade Leadership Coalition (TLC) released a briefing Thursday containing a review of the U.S. proposal and estimates of how its provisions may impact the U.S. automotive and parts industries.
The automotive Rules of Origin (ROO) are a fundamental part of NAFTA. Current proposals for the automotive ROO include: raising the threshold for the Regional Value Content (RVC), adding a requirement on the share of NAFTA steel and aluminum in certain parts, and adding a requirement that at least 30 percent of a vehicle’s content be produced in a country where labor earns more than the median North American wage for automotive manufacturing.
CAR analyzed these proposed changes. Key findings include:
- Unintended consequences: Stringent ROO could push more manufacturing out of the NAFTA region if targets are set too high, or the rules are too onerous.
- Potential market disruption: Between 25-87 percent of U.S. sales could be disqualified from trade using the NAFTA preference.
- Increased consumer costs: The proposal would add between USD 470 and 2,200 to the cost of affected vehicles.
- Lower U.S. vehicle sales: CAR estimates a loss of 60,000 to 150,000 annual U.S. light vehicle sales.
- Fewer U.S. auto exports: Raising the cost of production makes U.S. exports less competitive on the global market.
- Potential decrease in North American automobile industry production: The high targets could mean more
NAFTA region trade will pay tariffs on U.S. imports. Once automakers and suppliers have to pay tariffs, the work could move even further offshore.
- Increase in U.S. and NAFTA automotive and parts production capacity not supported by growth in U.S.
market capacity: Automakers and suppliers are meeting peak U.S. demand with existing capacity, and since global overcapacity poses financial risks to companies, they will be cautious about expanding capacity.
- Inadequacy of proposed three-year transition period: CAR’s “Book of Deals” data show that the time from the decision to invest to production launch often takes longer than three years.
“NAFTA makes North America a complete automotive region, with production distributed to optimal locations based on cost, capability, and proximity to key assets. If these renegotiations are not considered carefully attempts to redistribute this balance could fundamentally weaken the competitiveness of the region as a whole,” said Carla Bailo, President and CEO, Center for Automotive Research.
The Center for Automotive Research is a non-profit organization based in Ann Arbor, Michigan. Its mission is to conduct independent research and analysis to educate, inform and advise stakeholders, policymakers, and the general public on critical issues facing the automotive industry, and the industry’s impact on the U.S. economy and society. For more information, visit the CAR website: www.cargroup.org.