Carmakers Fret Changes to NAFTA’s Rules of Origin

North American carmakers worry that even a slight change in rules that define “local” content could upset their global supply chains and hike vehicle prices, Automotive News notes.

The Trump administration is opening talks this week to modify the 24-year-old North American Free Trade Agreement in hopes of adding jobs in the U.S. A focal point of the negotiations will be so-called rules of origin that define local content.

NAFTA currently requires that 62.5% of a vehicle’s content value must come from Canada, Mexico and the U.S. for it to qualify for duty-free distribution among the three countries. That ratio is already higher than any other auto trade pact, according to industry representatives. But the White House is expected to demand a higher percentage.

NAFTA presently allows carmakers to calculate components as 100% local if as little as 70% of their content value actually comes from the three countries. But parts with less than 70% local content can’t be counted at all.

Industry experts tell AN the result has been a complex global supply chain for both North American and foreign carmakers that operate in the region. NAFTA local content rules have drawn dozens of major foreign vehicle manufacturers and suppliers to the U.S. But the pact also enables General Motors, Ford and Chrysler to tap lower labor rates in Mexico to offset the cheaper labor German and Japanese carmakers use for certain models in eastern Europe and Asia Pacific, respectively.

Trade experts predict that forcing North American producers to give up lower-cost sources for some components will result in higher vehicle prices. That result, they warn would make the region’s auto industry less competitive and ultimately hurt rather than help the job market.

But AN says manufacturers might opt to simply ignore new rules of origin and pay the higher tariff. Under international rules governing countries with most-favored-nation trade status, that rate would be only 2.5% for finished cars, the newspaper notes.