By Keith Leonard, Esquire
The United States and Mexico reached a trade agreement in August of this year. This deal has been publicized as a renegotiation of the North American Free Trade Agreement (NAFTA), the trade agreement that took effect on January 1, 1994 among the United States, Canada, and Mexico. Under NAFTA, by 2008, tariffs were eliminated progressively, and all duties and quantitative restrictions, with the exception for certain agricultural products traded with Canada, were also eliminated. In mid-September, Mexico indicated it is inclined to go ahead with such a bilateral trade pact even if no agreement can be reached with Canada.
In May 2017, the United States Trade Representative informed Congress that the President intended to negotiate with Canada and Mexico with respect to (the) NAFTA. Though, as of the writing of this column, no significant new trade deal has been reached with Canada, nor is there a new trade deal with Mexico. Bear in mind that the largest importer of motor vehicles into the United States is Canada, and the fastest growing major importer of motor vehicles in 2017 was Mexico. Also keep in mind that, as of the first quarter of this year, foreign motor vehicle manufacturers were projected to have made more cars and trucks in the United States than General Motors, Ford and all other U.S. companies. Foreign manufacturers of motor vehicles currently have some twenty-one assembly plants in Alabama, South Carolina, Georgia, Kentucky, Tennessee, Mississippi, Indiana, Ohio, Michigan and Texas.
The foregoing elimination of tariffs under NAFTA was only for products that met specific requirements to qualify as being made in North America. Under current NAFTA rules, in order to qualify for duty-free treatment, 62.5 percent of the content of a vehicle has to be from the NAFTA countries. According to the information released by the United States Trade Representative in its fact sheet about the deal with Mexico, that percentage is being raised to seventy-five percent. Thus, it will be more difficult for an automobile to qualify for a zero tariff if not made in North America.
The trade deal further provides that some 40-45 percent of an automobile’s content has to be made by workers earning at least $16 per hour, in order to ensure American producers of automobiles and their workers are better able to compete on an even playing field; labor costs cannot be so substantially dissimilar as to draw manufacturing out of the United States. The United States and Mexico have also agreed to stronger rules of origin than those under both NAFTA 1.0 and the Trans-Pacific Partnership (TPP), including regulations for cars, automobile parts, and other industrial products. The NAFTA Rules of Origin are used to determine whether goods originate in one of the three NAFTA territories (United States, Canada, or Mexico). Goods qualify as originating in those territories if the goods are “wholly obtained or produced entirely in the territory of one or more of the parties.” Thus, goods cannot qualify simply by passing through Canada, Mexico, or the United States or by undergoing only minor operations in one of those NAFTA territories.
Similarly, reports suggest there is a provision that would allow the United States to charge tariffs above the normal 2.5 percent tariff rate (which applies to countries that do not have a trade agreement with the United States) for any new auto factories built in Mexico. In an interview in mid-September, Mexico’s finance minister indicated that Mexico has insulated its auto industry against any such U.S. tariff increase by signing a side agreement that “locked in” the current low 2.5 per cent tariff rate.
American-made vehicles are also largely insulated from tariffs, but what qualifies a vehicle as American made? Under the American-made index created by cars.com, assembly in the United States is a critical component of eligibility to be an American-made vehicle. The five major factors used to determine the economic impact of a given model are assembly location, domestic-parts content as determined by the American Automobile Labeling Act, engine sourcing, transmission sourcing and factory jobs provided by each automaker’s American plants. Another index compiled by American University’s School of Business uses the following seven criteria — profit margin, labor, research and development, inventory, engine, transmission, and body, chassis, and electrical components. So, is your decision to buy a certain vehicle affected by its economic impact on America and its workers, or some other factor(s)?