Trump's push for American-made could disrupt NAFTA supply chains and raise consumer prices

Shopping for a new set of wheels at a Chevy dealership recently, Patrick Spradlin had a few priorities: a good commuter car, room for his family of five, low maintenance costs and no more than $20,000.

About the last thing on his mind was where such a vehicle and each of its components — whether engine, car seats or spark plugs — were made. “That’s not a make-or-break issue,” said the 38-year-old systems engineer from Whaleyville, Md.

But such details about the origin of car parts and hundreds of other products may soon take on greater importance under the Trump administration, potentially translating into significant costs for consumers like Spradlin.

The issue, known in trade jargon as rules of origin, figures to be a major bone of contention as President Trump undertakes his promise to radically overhaul the North American Free Trade Agreement.

The 23-year-old pact is mind-numbingly complicated in its details. But what it boils down to is a system that allows the U.S., Canada and Mexico to trade hundreds of billions of dollars of goods with each other without having to pay duties.

On motor vehicles, there is a provision allowing duty-free imports and exports so long as at least 62.5% of the value of a vehicle originates in one or more of the three nations. Trump’s trade team is looking to raise that percentage significantly, on the theory that it will boost domestic production and jobs by preventing manufacturers from bringing in more components from Asia and other countries outside North America.

There’s no assurance, however, that a higher rule of origin threshold, say 75% or 80%, will prompt car makers to move work from existing locations or make new investments in the U.S. rather than in the other two countries, particularly Mexico.

Building new manufacturing plants or expanding existing ones would require companies to spend millions, even billions of dollars. And manufacturers don’t want to be saddled with excess capacity should the market slow down.

One way to minimize such costs while complying with higher content rules would be for car makers to make more of their components in Mexico, where labor is much cheaper. Or automakers could simply decide to opt out of NAFTA and pay duties, which average just 2.5% for cars imported into the U.S. 

But there’s also a deeper-seated problem: Nobody — not consumers like Spradlin, not the federal government, not even the automakers themselves in many cases — seems to know the precise values, by national origin, for what goes into a particular car or truck. That makes it practically impossible to know how much to raise the minimum regional content and whether doing so would make any difference at all.

Thousands of parts and materials from all over the world go into a typical vehicle, many crossing borders back and forth. Take car seats, which contain individual pieces of metal, foam, cover and electronics, some shipped from Asia and others trucked in and out of North American borders before being put together and then installed at a final-assembly car plant. 

The process of disentangling, cataloging and assigning values to parts at each stage of production is exceedingly complex. All the more so because automakers are continually modifying the components that go into their vehicles.

So hashing out fresh rules of origin would be painstakingly slow, hard to keep current and, in the end, might do little more than disrupt highly intricate, multinational supply chains for some car companies and increase the cost of cars for buyers.

“What you would have, first, is years of mind-numbing negotiations over highly technical rules of origin for specific products,” said Warren Maruyama, a veteran Washington lawyer who worked on NAFTA and other trade issues in both Bush administrations. “Then, at the end of it, you’re going to have some U.S. workers and producers who are going to be quite happy and some of them are going to be completely screwed.”

He added: “You may find that if you jack the origin requirement up to 75%, no one can meet it, and some U.S. auto workers are out of a job in Michigan, Ohio and Indiana because we can’t export our U.S.-built vehicles to Canada and Mexico anymore.”

It’s not clear when NAFTA renegotiations might start, but trade analysts say Trump is likely to give the required 90 days’ notice to Congress sometime in March, starting the process of what will almost certainly be rocky talks. 

Trump has blamed trade deficits and offshoring by manufacturers for lost American jobs. Last year, the U.S. recorded a trade deficit of $63 billion in goods with Mexico — the fourth largest after China, Japan and Germany. Trump has threatened to slap a 20% tax on imports from Mexico and other countries that have trade surpluses with the U.S. And bilateral tensions have been further roiled by the president’s insistence that Mexico pay for a wall across the southern border.

Wilbur Ross, Trump’s new Commerce secretary, is the U.S. official who will be leading the NAFTA talks. Like his boss, Ross broadly favors protectionist policies like Buy America. 

On several occasions Ross has taken particular aim at rules of origin, citing them for his opposition to the Obama-led trade pact with 11 Pacific Rim countries including Japan, Malaysia and Vietnam. The Trans-Pacific Partnership, as it was called, was never ratified by Congress, and Trump killed it for good as soon as he took office.

The rules of origin in the Trans-Pacific Partnership called for a 45% regional-content requirement for autos. Critics argued that was opening a big back door to China and other low-cost nations that are not part of the pact, to sell a lot of car parts in North America duty-free. 

Trade agreements, including NAFTA, have rules of national origin for footwear, textiles, electronics and other goods, but probably no product group is as weighty as autos. The American trade deficit in the automotive industry was about $200 billion last year — more than a quarter of the nation's total deficit in goods. 

Some analysts think that in NAFTA renegotiations, the Trump administration could press for a minimum U.S.-made value in cars, for example 40%, in addition to an overall higher rule of origin for all North American content. Any such made-in-U.S. provision would present a challenge because “currently there is no way to know the U.S. content of your vehicle,” said Kristin Dziczek of the Center for Automotive Research in Ann Arbor, Mich. 

The U.S. Transportation Department only reports the combined American and Canadian percentage of a vehicle’s contents, and these statistics don’t capture the full extent of the value because the cost of assembly, labor and other overhead are not tallied. 

Auto firms self-report data on content origin, and it’s enough for them just to certify that a vehicle meets the NAFTA 62.5% minimum to qualify to ship them duty-free in North America. Tracking precisely how much a car or truck has exceeded that threshold would only add to a company’s costs — and likely to consumer prices.

Over the years, automakers have set up bewildering networks of suppliers around the world to maximize profits, often mixing and matching parts depending on demand and production flows. 

Spradlin, the Marylander looking to buy a new vehicle, was eyeing a GMC Terrain, a small SUV assembled in Canada. General Motors reported that the Terrain had 65% U.S. and Canadian content. Its engine, though, could be from either Canada or the U.S., and the transmission could come from Canada, Mexico or the U.S.  

“I don’t know if anybody at GM knows how many times a valve crosses the border from being a piece of iron to finally being part of an engine, let alone a car,” said James Rubenstein, a Miami University professor and co-author of the book “Who Really Made Your Car? 

But all those parts add up to make up three-fourths of a value of a vehicle.

Rubenstein doesn’t think that tinkering with rules of origin will help boost U.S. production and jobs, mainly because the industry has become so automated. Since the economic recovery in mid-2009, car sales have taken off and the industry’s gross output has more than doubled, but employment has gone up by 50%.

GM, Ford and other major car makers declined to comment on the record, in part because the White House has not yet proposed specific changes, but also likely to avoid drawing any unwanted attention from Trump, who has leaned on auto companies to manufacture more in the U.S. and not in Mexico.

But in the eyes of auto trade and lobbying groups, the Trump administration is barking up the wrong tree in targeting rules of origin.

At 62.5%, NAFTA’s regional-content requirement for autos is already the highest among the 12 free-trade agreements that the U.S. currently has, according to Matt Blunt, the former Missouri governor and head of the American Automotive Policy Council.

It would be better, he said, for the administration to focus on combating currency manipulation and other unfair practices by trading partners. (Trump has vowed to do that, at least in the case of China.)

Marina Whitman, former GM chief economist and group executive for public affairs during the NAFTA negotiations in the early 1990s, agreed with Blunt. 

“I think it’s a very misguided way of trying to increase jobs,” said Whitman, now a professor at the University of Michigan.

“What would happen if you tore up the supply chain or drastically changed it? The American auto industry as a whole would simply be less competitive than auto companies in other countries. That’s not a way to increase jobs in the U.S.”

don.lee@latimes.com

Follow me at @dleelatimes

 

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