Trump point man drops hint on key NAFTA priority: Stricter rules on auto parts

WASHINGTON — Donald Trump’s new point man on trade negotiations has shed some light on key goals in revamping the North American Free Trade Agreement, hinting Friday that priority No. 1 involves more automobile parts sourced close to home.

The newly confirmed U.S. commerce secretary told a television interviewer he intends to move quickly on NAFTA negotiations and wants to be aggressive on trade-related issues to spur domestic manufacturing.

Wilbur Ross was asked what he considers the most egregious parts of the current agreement, and the first thing he mentioned was interpreted by several observers as a reference to the formula for calculating car-part imports.

“First of all, I think the rules of origin were far too lenient (in NAFTA),” Ross told CNBC. 

“Rules of origin means how much goods can come in from countries outside NAFTA — and yet get all the benefits of absolution from tariffs…. I think those can be tightened up quite a bit.”

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It’s still unclear whether his rule-tightening talk is aimed at the U.S.’s neighbours, designed to limit imports within the continent — or at intercontinental trade, and limited imports from more distant suppliers in Asia.

But he appeared to provide a clue about how he intends to do it.

Ross at one point referred favourably to an aspect of the Trans-Pacific Partnership — a now-dead deal he opposed, and which would have allowed more Asian car parts tariff-free into North America.

There were some good things in the TPP that tightened rules, he said.

To observers, that could mean he wants to change the formula for calculating rules of origin. Because while the TPP was designed to increase the percentage of auto parts imported from Asia, it also promised producers a more stringent formula to calculate domestic content.

North American auto workers fumed about TPP lowering the domestic content requirement by 17.5 per cent. On the other hand, the deal offered a half-dozen pages of new definitions for what qualified as domestic content.

To explain the difference, Flavio Volpe of the Automotive Parts Manufacturer’s Association uses an analogy: suppose NAFTA was a two-page contract promising $10 million in business to North American suppliers; then TPP promised just $5 million — with 100 pages of legal protection.

So what does Ross want? Volpe expects he’ll aim for restrictions on both fronts — a higher percentage of content from North America, in addition to a stricter formula for calculating what North American content is.

“(So) 100 pages of terms, for that $10 million.”

Volpe said the different formulas can add or remove 10 per cent from the value of a regional-content requirement in a trade deal. As an example of the changes in the TPP, trade-policy adviser Peter Clark says it stripped the ability to use transaction values in calculating the net cost of a part. 

One big unknown is whether Ross might press for a sub-regional rule of origin — one that insists that, to avoid a tariff, a certain percentage be sourced from the United States.

One observer says Ross is an expert on these rules, as a billionaire investor in various industries including car parts. Eric Miller says he expects there will be winners and losers from these changes, even within Canada.

Smaller companies might do better than those requiring Asian parts, he says.

A former Canadian official, who worked on the 2009 auto bailout and now advises companies on trade, Miller says there’s reason to be concerned about the types of changes Ross has in mind.

He says many parts sourced from Asia are sourced there because it’s the only place they’re available.

“(It) is not because (companies are) seeking to ‘game the system.’ It’s just because there’s large parts of things that aren’t made here. The electronics industry is in Asia,” he said.

“(It) is pretty scary. Because the practical reality is it will drive costs up. The practical reality is it will make complying with the rules more complicated. But what it does do, I guess, from the perspective of those who would be proponents of this, is that it would force the rules of origin to adhere more strictly to what they claim to be: and that’s that 62.5 per cent North American content is really 62.5 North American content, up and down the supply chain no matter how you measure.”

It’s still unclear when Ross might start the NAFTA talks. Inside U.S. Trade reported this week that Ross told congressional Democrats that he could, around March 15, provide the legally required 90 days’ notice before launching trade negotiations.

But some lawmakers think it’ll take a while.

The U.S. government office legally responsible for dealing with trade negotiations is extremely short-staffed and still doesn’t have its cabinet member or senior levels of political appointees confirmed.

Alexander Panetta, The Canadian Press