Both Mexican and Canadian negotiators were taken by surprise when they arrived in Hawaii for a recent round in Trans-Pacific Partnership (TPP) trade talks. At that meeting, they learned that the United States had cut a deal with Japan on the important issue of automotive rules of origin without having consulted with them first.
According to World Trade Organization (WTO), “Rules of origin are the criteria needed to determine the national source of a product. Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports.”
Under the agreed upon terms of the North American Free Trade Agreement governing the terms of preferential trade between the United States, Canada and Mexico, automotive rules of origin stipulate that both auto parts and fully assembled vehicles may be sold duty-free in the signatory countries’ markets so long as 62.5 percent of content incorporated into those items originates within the borders of the NAFTA nations. In negotiations of the automotive rules of origin for the Trans-Pacific Partnership, Japan has sought the adoption of very liberal rules governing originating content percentage requirements. This is the case because a substantial portion of the Japanese automotive industry supply chain consists of companies that are not among the twelve partners that are party to TPP negotiations. One of the countries that is non-TPP that is integral to the Japan’s industry supply chain is Thailand. According to one of Canada’s major daily newspapers, Toronto’s Daily Globe and Mail, Japanese negotiators original proposal that automotive rules of origin requirements for the Trans-Pacific Partnership be set at 30 percent. The Globe and Mail went on to report that “the Americans started out at 55 percent and compromised at a lower rate.” When both Mexico and Canada balked at these terms, Japanese negotiators were surprised to learn that US negotiators had not consulted with either of their NAFTA partners before having come to an agreement with Japan on this important issue. Japan’s trade officials were under the assumption that the TPP automotive rules of origin issue had been settled. Now it appears that it has become an impediment to finalizing any agreement.
Lower TPP originating content percentage requirements would prejudice Mexican and Canadian economic interests
Mexico and Canada’s objections to TPP automotive rules of origin that set content requirements at a lower rate than the 62.5 percent incorporated into the terms of the NAFTA are based on well- founded economic terms. An agreement that is favorable from the Japanese perspective would not only lift a 2.5 percent duty that is currently levied on Japanese auto imports into the United States, but would also have a negative effect on the industry supply chains in both Mexico and Canada. Allowing Japanese vehicles that incorporate a large portion of Thai parts into their production to be sold in the US market, as well as within the borders of the other eleven parties to the TPP, would put the entire Mexican and Canadian supply chains at a structural disadvantage.
This would potentially affect both Canadian and Mexican vehicle and auto parts sales, as well as industry employment in both countries, negatively.
Because of this impasse, it is imperative that the Mexicans and Canadians return to the negotiating table with a counterproposal for TPP automotive rules of origin percentages that is acceptable to the four countries that are currently in disagreement. The Tecma Group of Companies will keep readers of this blog posted.