According to pundits, the NAFTA negotiating chambers must constantly smell of peanut breath. Or worse. That’s because there is always an elephant in the room.
In the case of the rules-of-origin discussions, the elephant is U.S. President Donald Trump’s repeated declarations that the U.S. is getting hosed on trade. He wants the NAFTA rules changed so that more stuff is made in the U.S., which would bring more jobs to his country.
But international trade specialist Anoop Madok says it’s not so straightforward now that the continental free-trade area has been integrated for decades.
Where is it made? No one knows
“It’s going to get bogged down because it’s not as clear as it appears on the surface,” says Madhok, a professor at the Schulich School of Business in Toronto.
“When you say ‘Where is it made?’ — if it goes between the U.S. and Canada 10 times and then to Mexico and back to the U.S., it gets messed up,” says Madhok.
Trump talks about tangible goods being made in U.S. factories, which is complicated enough, but manufacturing is a smaller and smaller part of the value chain.
“If you’ve got design happening, where did that come form?” asks Madhok rhetorically. “If the design was done jointly between a U.S. and Canadian team, where did that come from?”
Supposedly there are rules for all those things written in the NAFTA documents. But ripping the current deal apart and putting it together again is horrifyingly complicated.
‘Terrible things to deal with’
“Rules of origin are very, very complex,” former Canadian finance minister Michael Wilson once said. “You don’t want to deal with them. They’re terrible things to deal with.”
What came out as a few snappy words from the U.S. president represents interminable pages of complicated documents, says Sandy Monoz, once Canada’s chief negotiator on rules of origin and the one who cited Wilson’s quote above.
While cars and car parts are getting most of the attention this time around, the fact is almost every product or product classification — from textiles to air conditioners — has its own, completely different set of rules of origin.
Most of those rules have been specifically written to protect an individual industry within the three-country NAFTA bloc. For instance, in the U.S. the tariff on clothing is 15 per cent; to escape that tariff, Canadian and U.S. producers must use mostly American-sourced cloth.
Under the current NAFTA rules, automobiles must contain 62.5 per cent North American parts to be traded tariff-free within the three-country area.
The logic of that rule is that countries cannot just import cars from a third country, slap a few parts and a ‘Made in Canada” sticker on and then sell the car as Canadian-made.
One idea that might comply with Trump’s demands is to increase the total requirement for NAFTA-area content to, say, 75 per cent. Experts say that would be disruptive and costly as manufacturers struggled to find new sources for parts that simply aren’t made in the NAFTA region, such as back-up cameras.
Of course, if Mexican (or Canadian) manufacturing costs were lower, it could well be that most of the extra 12.5 per cent of manufacturing wouldn’t go to the United States at all.
Not satisfied
There have been reports that the U.S. will not be satisfied with simply raising the NAFTA-area rules of origin but actually wants to mandate a certain percentage of content made in the U.S.
“Technically, it’s possible,” says Monoz. “But lots of things are technically possible.”
Like Madhok, he says one of the biggest complications will be tracing all that national content in a system that is so deeply integrated. Not only would it be difficult, but just like re-sourcing parts or making thing in the U.S., it would be expensive. Adding costs and complexity means that manufacturers might eventually decide to ignore NAFTA altogether and just pay the 2.1 per cent U.S. tariff on imported cars.
Besides, says Conference Board of Canada chief economist Craig Alexander, such a plan is contrary to the free-trade principle that goods are best made where they are made best. That is what makes free-trade areas more productive.
“It isn’t a duty or a tariff; it’s a non-tariff barrier that you must produce things in America,” says Alexander. “A country-content requirement breaks the whole spirit of a North American trade deal.”
While Madhok is doubtful the three countries can leap the hurdles on rules of origin within the deadline, Alexander is optimistic that the talks will continue to be constructive.
“When you hear Trump talk about ripping up NAFTA, you get the sense that there isn’t going to be room for negotiation,” says Alexander. “But in point of fact, the negotiators at the table aren’t Trump.”
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