The current rules are subtly biased toward tangible inputs – things a person can drop on their foot
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By Christopher Beddor
WASHINGTON (Reuters Breakingviews) - The auto industry has exposed a blind spot in the North American Free Trade Agreement. Canadian negotiators, locked in tense talks over the trade pact’s future, have pointed out that it doesn’t capture the value of high-tech equipment in autos such as software, Reuters reported last week. A rule change is due.
Under current NAFTA rules, at least 62.5 per cent of the content of autos must originate in North America in order to qualify for tariff-free trade. American negotiators are looking to raise that threshold to 85 per cent, where 50 per cent must come from the United States in particular.
Those numbers are unhelpful in more ways than one. Rules on where products come from tend to focus on physical goods, but less so on things like research and development, engineering, design and software development. More clearly factor those in, a suggestion put forward by the Motor and Equipment Manufacturers Association, and many cars and auto parts might magically look more American because many of those aspects of manufacturing are typically located in the United States.
The proposal highlights a real shortcoming in NAFTA. The current rules are subtly biased toward tangible inputs – things a person can drop on their foot. But the value of cars increasingly lies in their technology and software. Under the current rules, an innovative safety feature might come from a company headquartered in Detroit, but that might count for little if the car were physically produced in Mexico.
It also underscores the shortcomings of traditional trade statistics. For example, the gross figures often cited overstate the U.S. deficit. Some sources, such as the Trade in Value-Added database produced by the Organisation for Economic Co-operation and Development, do a better if still imperfect job of capturing the real value of trade. Seen their way, the U.S. deficits with NAFTA countries shrink by around 40 per cent.
As NAFTA gets rehammered out, everyone involved is talking their book. The industry proposals may therefore have a whiff of statistical legerdemain. Meanwhile, U.S. officials are looking to shore up physical manufacturing jobs in the United States. That’s the reality of trade negotiations – but it would be a shame if in their desire to score points, NAFTA negotiators ignored the new reality of trade itself.
CONTEXT NEWS
- The sixth round of renegotiations on the North American Free Trade Agreement concluded in Montreal on Jan. 29.
- U.S. Trade Representative Robert Lighthizer dismissed a Canadian proposal related to so-called rules of origin for automobiles, saying it may lead to less regional content and fewer jobs in North America.
- At present, NAFTA regulations require that at least 62.5 per cent of the content of autos originate in North America in order to qualify for duty-free market access. American officials have proposed raising that level to 85 percent, including a requirement for 50 per cent of content to hail from the United States. The current rules for tracing auto parts do not account for new software-based content made in Canada and the United States, among other things.
- Canadian negotiators suggested that North American content in auto manufacturing would be higher if the value of high-tech equipment such as software is taken into account, Reuters reported.
