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The NAFTA RULES of Origin: What are they and why are they important?

The NAFTA RULES of Origin:  What are they and why are they important?

NAFTA RULES OF ORIGIN

One of the highest priorities cited by the Trump administration regarding the ongoing renegotiation of the North American Free Trade Agreement between the United States, Canada, and Mexico concerns the tightening of the NAFTA Rules of Origin.

WHAT ARE RULES OF ORIGIN?

“Rules of origin are agreed upon guidelines that define the regional value share and/or transformation that must take place to ensure that goods that are imported from Mexico and Canada are actually produced in the three parties to the trade treaty’s countries.”

WHY ARE THE NAFTA RULES OF ORIGIN IMPORTANT?

It is important to note that the NAFTA rules of origin that are currently in place were negotiated by the three signatory countries in the early 1990’s. According to current Secretary of Commerce, Wilbur Ross, are now in need of tightening, “because there are holes in them by which countries that are not a party to the agreement benefit.”  He additionally expressed that the “loose” rules of origin of the NAFTA have had the economic effect of reducing US employment in the automotive industry.

The current position of the US government is that the NAFTA rules of Origin need an updating and tightening in order to restrict duty-free benefits in trade to commerce between the three nations. Some argue, however, that this change will inevitably result in higher costs for producers and rising product prices for consumers. They assert that, to the contrary, a loosening of the rules that govern content would promote greater global economic efficiencies and, therefore, would have the opposite effect.  Others contend that a tightening of the rules “transfers protection of the final good on to the parts and components that are used to produce it.” They argue that tightening of the NAFTA rules of origin would constitute a form of protectionism.  Furthermore, stricter rules of origin are often designed to protect some industries and result in product and economic distortions.

Today the rules of origin are spelled out on a product by product basis in the more than three hundred pages of Chapter 401 of the North American Free Trade Agreement.  According to experts on trade, they are voluminous and highly complex. Many are of the opinion that a positive reform and retooling of the NAFTA rules of origin should create a single, “lower regional value content threshold that can be applied uniformly across products”.  Not only would this have the effect of lowering costs for producers and consumers of items imported and exported in the NAFTA region, it would also lower the administrative costs required to document origin.

NAFTA RULES OF ORIGIN AND THE AUTO INDUSTRY

The most prominent sector in which the US negotiators wish to address the issue of tightening the NAFTA rules of origin is the automotive industry.  Currently, it is stipulated that, in order to be considered a North America originating product, 62.5% of the value of a vehicle must be derived from NAFTA country inputs. According to a recent US Department of Commerce analysis, “since the early days of the NAFTA in 1995, automotive value-added content from non-NAFTA countries has increased from 13.2% to 29.5%.”  “US Secretary of Commerce, Wilbur Ross, has frequently criticized the NAFTA rules of origin as a “back door” for Chinese auto parts to enter the United States through Mexico and Canada and that the trade pact’s benefits need to be restricted to its members.”

While officials such as the US Secretary of Commerce see the NAFTA rules as they are defined at present as a negative, others point to the recent growth in the country’s automotive industry as visible proof that they should be kept intact as they are. Statistics show that in 2016 one thousand more vehicles were manufactured in the United States than were built in the year preceding the implementation of the NAFTA.  Also, since the beginning of the NAFTA, the US has doubled its automotive exports, while construction of new plants has taken place in Texas, Tennessee, Georgia, Mississippi, and South Carolina.  During the same period, plant expansions have taken place in Indiana, Kansas, Kentucky, Michigan, Missouri, and Ohio.  Furthermore, within the last thirty days, both Toyota and Mazda have announced that they will build a US assembly plant, while BMW, Ford, Honda, Mercedes-Benz, and Volvo have announced US expansions.  Additionally, over the past year, General Motors has invested $US 3 million in its facilities in the country, while Fiat-Chrysler has recently made commitments for US $9.6 billion in future investments.  Some are of the opinion that a change in the NAFTA rules of origin to a percentage of higher than the current 62.5% for the automotive industry could prove to be deleterious to future further job creation and investment in domestic industry.

TIGHTENED NAFTA RULES OF ORIGIN MEAN MORE INVESTMENT IN MEXICO?

Some in Mexico, including Francisco de Rosenzweig, of the law firm White & Case, believe that stricter rules of origin for the automotive industry will result in the movement of more automotive suppliers to Mexico. Auto suppliers that establish new facilities in Mexico will be beneficiaries of both duty-free treatment for their products within the North American Free Trade Agreement region, as well as advantageous labor costs.

The NAFTA rules of origin are fundamentally important to the functioning of the North American Free Trade Agreement as envisioned by the signatory nations.  They have been put into place to make sure that items traded on a duty-free basis within the block are actually made in the United States, Canada, and Mexico.   The position taken by the US through its Secretary of Commerce, Wilbur Ross, is that rules should be tightened.  They argue that doing so will limit the ability of companies from outside of the NAFTA zone to benefit from the trade accord.  They also make the case that a stricter set of origin rules will protect US jobs and investment.

Opponents to the imposition of new and tighter NAFTA rules of origin argue that making content requirements more onerous would have the impact of increasing the cost of production of goods.  This cost, ultimately, would be borne by the consumer.  They assert that higher barriers to trade implemented in this manner would result in global economic inefficiencies.

The reader is encouraged to review further such articles on the blog at http://tecma.com.

 

 

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