By Alex Russ, AEM Director of International and Regulatory Affairs
With the fifth round of talks concluded in Mexico City, and a new round on deck in January in Montreal, the Trump administration’s bid to renegotiate NAFTA has hit midair turbulence.
U.S. and Canadian negotiators have been publicly sniping over the terms of a new agreement. So far, few parties – including U.S. business – are satisfied with the U.S. negotiators’ proposals to change NAFTA.
Here are a few issues to watch:
- Rules of Origin: The U.S. proposal to change NAFTA’s Rules of Origin Chapter could negatively impact equipment manufacturers. Rules of origin are criteria used to determine a product’s country of origin for purposes of trade treatment. Currently, a product is allowed duty-free access to NAFTA member nations if it meets certain thresholds of North American content. (Right now, most products in our industry must produce 60 percent of the total value of the product in North America to qualify.) However, some products have to hit 62.5 percent. The new U.S. proposal ups that requirement to 85 percent North American content, and demands that 50 percent comes from the United States or face a tariff. Given the current supply chains for many U.S. equipment manufacturers, this would be a difficult or costly change to stomach.
- Sunset Provision: U.S. negotiators have also floated the idea of introducing a clause in which NAFTA would terminate every five years unless the U.S., Canada and Mexico all agree to extend the agreement. This proposal would discourage foreign direct investment in the United States, especially if they risk losing preferential access to customers in Canada or Mexico every five years.
- Ending NAFTA Altogether: President Trump has made references (at varying levels of specificity) to the U.S. withdrawing from NAFTA altogether. Regardless of whether this is a negotiating tactic, U.S. withdrawal from NAFTA would be cataclysmic for our industry. Canada and Mexico are the two largest export markets for equipment manufactured in the United States. The penalty would be especially tough in Mexico, where U.S manufacturers would be forced to pay Most Favored Nation (MFN) duty rates on their products exported to Mexico. It is not pretty. Applied rates on many products in our industry range up to 25 percent, with some products even hit with duties much higher.
If the U.S. is serious about updating NAFTA to benefit U.S. manufacturing, it should listen to actual manufacturers. Earlier this year, AEM submitted its priorities to the Office of the U.S. Trade Representative and Global Affairs Canada. Updating NAFTA is possible to benefit U.S. manufacturing and reach consensus with all three trading partners. Prior to offering future proposals, negotiators should ask:
- How can we update NAFTA to increase the global competitiveness of U.S. manufacturing?
- How can we attract more investment in domestic manufacturing and hire more American workers?
- What can we do to help small manufactures export more of their products?
AEM continues to provide these answers to the U.S. government. The question remains, are they listening?