U.S. Pushes Stiffer Content Rules for Nafta Car Makers

By Robbie Whelan Features Dow Jones Newswires

MONTERREY, Mexico -- American trade negotiators are taking aggressive measures to close what they describe as a Mexican "back door" through which steel and other auto-manufacturing components produced outside North America are sold tariff-free in the U.S.

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The U.S. trade representative has proposed a significant expansion of the North American Free Trade Agreement so-called tracing list for auto manufacturing, which enumerates parts that require stringent proof of where they were originally made, according to three people familiar with the proposal.

If incorporated into a new deal, the stiffer requirements, laid out in a text presented at last month's Nafta talks in Washington, could upend the supply chains vehicle manufacturers and auto-parts suppliers have established in Mexico's industrial north over the last 25 years by making it harder for companies to meet requirements that the vast majority of the components they use originate in the U.S., Mexico or Canada.

President Donald Trump has roundly criticized the $63-billion U.S. trade deficit with Mexico, much of which stems from automotive manufacturing, and promised to revamp or pull out of Nafta in order to reduce it and bring back U.S. factory jobs. "We are in the process of trying to rebalance" the Nafta trade relationship, said Robert Lighthizer, the U.S. trade ambassador, after last month's talks.

Under current Nafta requirements, car manufacturers with assembly plants in Mexico, including General Motors Co., Ford Motor Co., Fiat Chrysler Automobiles NV, Nissan Motor Co. and others, must prove that 62.5% of the value of components in their vehicles originate in one of the three Nafta countries. In addition, auto-parts firms must prove that several dozen priority parts used in engines and transmissions are manufactured in North America.

The U.S. has proposed raising the regional content requirement to 85% and wants to expand the tracing list to include steel, leather and fabric used in seat cushions -- essentially "all the components of a car, " according to a person familiar with the U.S. negotiating team's position.

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General Motors and Fiat Chrysler declined to comment, and Ford didn't respond to a request for comment. The Alliance of Automobile Manufacturers, a trade group of car makers operating in the U.S., has expressed strong opposition to the proposal, saying Nafta's current rule of origin for cars is the highest of any trade agreement and raising it further would harm rather than help the U.S. auto industry.

"By increasing the regional content requirement to 85%, mandating a U.S. domestic content requirement of 50% and increasing the regulatory burden of meeting such strict requirements by expanding the 'tracing list,' you will likely see an increase in Chinese content," said AAM spokesman Wade Newton. "Rather than attempt to comply with such stringent regulatory requirements, it will make more economic sense for companies to shift production to low-cost countries, like China, and simply pay the 2.5 percent tariff to import the product into the U.S."

"In that scenario, the U.S. loses and China wins," he added.

Many auto-parts suppliers import steel and other metals, hardware, and electronic components from China, South Korea and Eastern Europe and integrate those components into finished products in Mexican factories, permitting parts that have been "substantially transformed" to be considered North American in origin.

"A lot of times you import something from Japan or somewhere else and paint it here," said Manuel Montoya, general director of the Automotive Cluster of Nuevo León, a trade group here that represents hundreds of parts manufacturers. "It's not Mexican content, truly, it's just Mexican-painted."

Component producers in Asia -- particularly China -- and the European Union have been the biggest beneficiaries of the practice, using Mexico's swiftly growing industrial north as a "back door" into the Nafta markets, U.S. officials contend.

The U.S.T.R. is also seeking to curtail or eliminate a similar process known as "tariff shift," which allows Mexican manufacturers to change the customs classification of a product that enters the country from outside the Nafta region by adding value to that product in a manufacturing plant, according to people briefed on the plan.

For example, the copper wire used in the electronic dashboard of a car sold in the U.S. may have been produced in China, but since it was assembled into a wire harness in a Mexican factory, its tariff code can be changed to that of the final product, thus making it qualify for tariff-free importation under Nafta. Under the changes sought by the U.S., those wire harnesses could be classified as non-Nafta content.

The U.S. imported roughly $51 billion in vehicles and $23 billion in auto parts from Mexico in 2016, according to a study released in October by Boston Consulting Group analyzing the impact of the U.S.T.R.'s proposals.

The report found that eliminating tariff shift and expanding tracing requirements could lead to the loss of 24,000 jobs in the U.S. auto-parts industry, because manufacturers would opt to buy cheaper auto parts from low-cost countries and pay the relatively low tariffs on those parts, rather than buying more expensive, North American-made components.

"The industry must have access to specific raw and finished materials for manufacturing," said Ann Wilson, senior vice president for government affairs at the Motor and Equipment Manufacturers Association, which represents U.S. auto-parts makers. "Those materials are not always available within the region."

In Mexico, the proposal would force hundreds of auto-parts suppliers and vehicle manufacturers to remake their supply chains.

"For years, much of our sourcing has been from other countries outside of Nafta because it's so much cheaper," said Francisco Piña, director of imports and exports for Grupo Quimmco, a large supplier of truck axles, brakes and engine blocks based here in Monterrey. Mr. Piña estimates that more than 80% of Quimmco's products use components from outside the Nafta region that have undergone tariff shift.

"If a screw from China is $1.00, it's $1.20 here, and $1.60 in the U.S., and if you have to buy it here or from the U.S., that's going to hit your profits," he said. "You have to find sourcing, develop it. It would take years to develop relationships with new countries, and be a total change in the structure of the suppliers."

Nevertheless, most Mexican auto-parts suppliers say changes to Nafta, or even a U.S. withdrawal from the agreement, would constitute a disruption, but not a death blow to their industry.

Katcon, a Monterrey-based auto supplier that produces about one million exhaust systems a year for clients including GM and John Deere, says it has set up its supplier base so the bulk of the inputs in its products come from North America, but still relies on precious metals such as palladium and rhodium that are available only in Africa for catalytic converters.

The company also buys steel tubes from a Korean-owned company based in Canada, and on a recent visit to one of its plants here in Monterrey, there were piles of cardboard boxes full of motorcycle parts labeled "Made in China" on the manufacturing floor.

"If the prices of supplies go up, well, then prices of the final product must go up too," said Fernando J. Turner, Katcon's chairman. "No one has asked the farmers in Kentucky -- the ones who went for Trump -- 'do you want your tractor or your truck to be 25% more expensive?' The person who is going to pay, in the end, is going to be the U.S. consumer."

--Dudley Althaus, Juan Montes and Chester Dawson contributed to this article.

(END) Dow Jones Newswires

November 09, 2017 07:14 ET (12:14 GMT)