U.S. demand on autos for NAFTA: Make huge changes, immediately

ARLINGTON, United States _ The United States is presenting a triple-whammy demand on auto manufacturing at the NAFTA negotiations, including a strict “Made In America” requirement with virtually no grace period to allow car companies time to adjust.

The proposal is viewed as a non-starter by virtually every party involved in automobile production: Canada, Mexico, U.S. industry, and even labour groups were calling the proposed numbers completely impractical.

It’s one of the biggest issues of the talks and it’s sure to provoke a backlash on multiple fronts. Several sources said Friday the U.S. negotiating team has been showing industry representatives the proposal they are presenting to Canada and Mexico.

It contains three ideas automakers say would complicate production.

First, it requires all cars to include 85 per cent North American content to avoid a tariff, up from the current 62.5 per cent; 50 per cent of a car’s content would have to come from the U.S.; and it would toughen the way content is calculated, with a list upgraded to include parts that didn’t exist in 1994 when NAFTA was originally implemented.

The proposed phase-in period is minuscule.

Automakers would have one year to comply with the American-made quota and two years to comply with the overall North American content requirement under the proposal, which is a radical departure not only in substance but also in the timing of phase-in periods normally included in trade agreements.

The demands are deemed so impractical the talk in the hallways at the conference site revolves around which of two objectives the Americans are trying to achieve: Sabotage the talks, or shock other parties into concessions.

A Canadian auto-parts representative tends toward the latter explanation.

“My instinct is this is, ‘Art of the Deal’,” said Flavio Volpe. “There are those who think these are poison pills designed … to get the partners to leave the table.”

The proposal came as the U.S. made its first significant move on dairy, a traditional sticking point with Canada. Insiders said Friday the U.S. has asked Canada to eliminate its new rules benefiting domestic producers of diafiltered cheese-making products.

It has not yet made any explicit demand for changes to Canada’s supply-management system.

Earlier U.S. demands include a termination clause that would cancel NAFTA after five years, unless all parties agree to extend it, and a Buy American rule that would make it far more difficult for non-U.S. companies to bid for public projects.

The auto proposal is so controversial organizations that are normally rivals are allied against it. Volpe’s Automotive Parts Manufacturers’ Association says it could create a perverse incentive: producers might simply shift away from North America and hurt the entire continent.

The argument is that it’s far easier to ignore the NAFTA rules and simply pay the U.S. 2.5 per cent import tariff: “It’s not good for the Americans,” Volpe said. “It just doesn’t make sense from a business perspective.”

The union representing Canadian auto workers agrees.

Unifor’s Jerry Dias says the U.S. would never have the power to enforce the proposed changes because companies would just ignore it: “All this argument about 50 per cent, 70 per cent, 85 per cent, it means nothing as long as the U.S. has a 2.5 per cent tariff. It’s like the emperor with no clothes,” Dias said.

“They can yell, scream, threaten, then people say, ‘Okay, here _ I’ll pay the 2.5 per cent’.”

He said it’s a moot point anyway because there’s no chance Canada or Mexico will ever agree to a NAFTA that looks like what the Americans are proposing.

“Get it out of your head. That’s never gonna happen,” Dias said.

“It’s not going to happen. I know for sure that Canada will never accept (this)… None of these things are going anywhere. … This is a deal that is going nowhere very quickly.”

Scotiabank analysts agree the proposals would hurt their author.

Car companies would have an incentive to move production away from the U.S. and Canada _ either to Asia or Mexico _ and pay a tariff rather than deal with the rules being proposed by the U.S., said its deputy chief economist Brett House.

“If accepted, the U.S. (proposal) would be a pyrrhic victory,” he said.

House called the proposal a poor solution to a non-existent problem. Growth in auto employment since the Great Recession has skyrocketed in the U.S. to six per cent a year and he said North American content is on the rise in cars produced in Canada and Mexico, contrary to figures being floated by U.S. Commerce Secretary Wilbur Ross.

“There’s no problem here to address,” he said.

One real problem, however, is stagnant wages: U.S. auto salaries have not seen an appreciable increase for years, according to data from the U.S. Bureau of Labor Statistics. Dias says that’s the problem everyone should be attacking _ by increasing labour standards, especially in Mexico.