Donald Trump campaigned in part on the flaws in the auto rules of the Trans-Pacific Partnership. Much of his renegotiation of NAFTA has focused on tightening up those rules. As this paper explains, he can rightly claim some credit for strengthening them. But there are nevertheless questions about whether those rules will work the way they’ve been advertised. And there’s an even bigger question about whether renegotiating these rules was coordinated with the Administration’s efforts to address Made in China 2025, or whether they’re working at cross-purposes.
Here are nine questions about the new rules in NAFTA 2.0.
- Will these changes have any practical effect in changing supply chains, or will they just memorialize existing ones?
- The rules identify “core parts.” Is it possible that despite suggestions that all core parts must be sourced in the region, most of them can be sourced from China, and the vehicle will still be eligible for duty-free treatment under NAFTA 2.0?
- This includes lithium-ion batteries. If these batteries can be sourced from China and the car will still be eligible for duty-free treatment under NAFTA 2.0, then how does that square with the Administration’s strategy of containing Made in China 2025, which includes electric vehicles?
- The Administration has touted its new minimum wage requirements as a way of addressing wage suppression issues in Mexico. Right around the signing of the new NAFTA, GM announced that it was moving some of its vehicle production from the United States and Canada to Mexico. What does this say about the new labor value content minimum wage rules, which were designed to limit the kind of production shifts that GM just announced?
- The Administration states that the rules of origin will provide greater incentives to source goods from the United States, help “re-shore” vehicle and parts production in the United States, and transform supply chains to use “more United States content.” The agreement is regional, and the rules are regional. How, exactly, will the agreement provide greater incentives to source in the United States, as opposed to Canada or Mexico? Does GM’s move contradict these assertions?
- The auto rules have provisions on “transitions” that permit exceptions to the new rules. Can the “transitions” language be amended without going through Congress? If so, does that mean this Administration, or a subsequent one, can simply loosen the rules once the agreement has entered into force?
- Of all manufacturing content issues, the Trump Administration spent the most time and energy reforming the automotive rules. If even these rules continue to allow significant content to be sourced from China, then what does that say about the rest of the manufacturing rules, which are weaker than the automotive rules?
- The President complained about too much free-riding off NAFTA from countries like China. The original NAFTA had a rule that allowed an extra 7% of the good to come from outside the region, as a sort of margin of error. NAFTA 2.0 raises it to 10%. While Mexico will have to abide by the new labor rules, China, as a non-party, will not. Why would the Administration raise the de minims level, allowing more content from free-riding non-parties?
- Agricultural products, mainly dairy, are given a reprieve from this margin of error. Why is the Administration, which is focused on returning manufacturing to U.S. shores, perpetuating the exclusion of some agricultural products from these rules, instead of either eliminating de minimis altogether, or applying it equally to all products?
Supply chains are now so complex that reining in China – which Ambassador Lighthizer is serious about — will not merely be a matter of slapping duties on Chinese imports. It will require a wholesale reconsideration of the regime we have constructed since NAFTA first entered into force. We often think of NAFTA as offshoring U.S. manufacturing jobs to Mexico, but in fact NAFTA, and all the agreements that followed, offshored U.S. manufacturing jobs to China and other non-parties too.