Industry awaits clarity on costs of trade deal

WASHINGTON — Last week's agreement on a NAFTA refresh eases some of the tensions between the U.S. and Mexico, but it doesn't end the uncertainty surrounding automotive supply chains in North America.

The administration is notifying Congress of its intent to update the regional trade pact, but under the law for speedy reviews, negotiators will have 30 extra days to fill in details.

Auto industry executives are on pins and needles waiting for the fine print so they can determine how much it would cost to meet aggressive new rules of origin that determine which vehicles and parts qualify for duty-free status.

Officially, the deal would require that 75 per cent of auto content be made in North America, up from 62.5 per cent, to cross borders duty-free. It also would require that 40 to 45 per cent of auto content be made by workers earning at least US$16 per hour. Passenger vehicles would also need to include a certain percentage of North American-produced steel and aluminum.

The U.S. administration's goal is to raise labour rates in Mexico, or at least discourage car companies from moving production out of the U.S. in search of lower wages.

Automakers, especially foreign brands, and suppliers preferred the status quo, but suggest they are likely to accept the higher thresholds, if grudgingly.

"Automakers, in general, have very low expectations about what is going to emerge from this process," said a former U.S. trade negotiator who asked not to be named because of ties to auto interests.

"Even though it's going to add costs and be a pain in butt, compared to the possibility of no NAFTA, they'll grit their teeth" and adapt, this person added.

Rob Wildeboer, executive chairman of Martinrea International Inc., said the Ontario supplier "can live with" the content and wage rules the U.S. and Mexico agreed to. He said that the labour provision would not entail major changes, and that the US$16-per-hour figure is line with how vehicles are already produced in North America.

"I can't see the supplier base complaining a whole lot, and I think that overall we haven't increased the cost of making vehicles a lot," he said.

Wildeboer said the rules, should they be implemented, would not have a large impact on where automakers and suppliers build plants.

"If I am a European-based car company, and I find that it's cheaper to make vehicles in Mexico and those vehicles are going to be imported into the EU, I'm probably going to be as inclined to build in Mexico as anywhere else, and that's what we've seen," he said. "Similarly, those Mexican states will compete with North Carolina, South Carolina and other U.S. states to say, 'I'll make it worth your while. Here's US$800 million to locate here.' I think those things are going to continue."

Executives say they can achieve the higher thresholds for regional and labour value content if they have a sufficient transition period, but ease of compliance will vary by company.

"Some companies are going to feel more pain than others. But if the transition was immediate you'd have losers" all around, Flavio Volpe, president of the Automotive Parts Manufacturers' Association in Canada, told Automotive News.

About 40 per cent of the content in Mexican-made vehicles comes from the U.S.

"The Mexican assembly sector can make it work, but that's an aggregate number," Volpe said. "There are firms that only use 20 or 30 per cent U.S. content, so they need a transition period to change their supply dynamics or find themselves on the outside looking in."

Some companies, according to experts, may opt to pay the existing 2.5 per cent duty for nonconforming vehicles rather than spend to comply with the new rules.

The American side is pushing for a three-year transition period, but a source close to the talks said auto interests could effectively get a desired four- to five-year transition period because it will take many months after ratification for Congress to pass legislation implementing the changes.

The aggressive content threshold "will prove challenging for some of our members," said Ann Wilson, senior vice president for government affairs at the Motor & Equipment Manufacturers Association. "Given enough time, I think a majority of the industry is going to be able to cross the finish line."

But amid questions about when, or even whether, Canada would join the handshake deal between the U.S. and Mexico, trade experts said the auto rules can't work without a trilateral agreement, because automakers have too much investment in Canada. The discussions with Canada took a frosty turn late last week after reports that U.S. President Donald Trump had privately ruled out any compromises with Canada.

U.S. officials say the proposed agreement with Mexico would also streamline certification and verification of rules of origin, but industry representatives caution that tracking high-wage labour and the added regional content in each vehicle would be a challenge.

Companies would need to drill down to each model to analyze how the rules would apply and whether they would have to adjust their manufacturing footprint or sourcing practices, said Juan Francisco Torres Landa, a law partner in the Mexico City office of Hogan Lovells.

The onus for meeting the labour value content provision is on automakers, Volpe said, but suppliers would also be affected. Manufacturers would have to demonstrate that 40 per cent of a vehicle's content comes from a high-wage factory, but if they can't meet the threshold with their own work force pay scale, they would need suppliers with high wages to make up the difference and certify those wage rates.

That would almost necessarily mean sourcing more components from the U.S. and Canada, he said, "because if you're a manufacturer facility in Mexico, you're not paying US$16, and you're not going to find the supplier in Mexico that pays US$16."

The labour value content is based on a blended wage that includes some white- and blue-collar workers. That means automakers would be able to count r&d workers toward the labour threshold. How that would be calculated and enforced is unclear.

Said Kristin Dziczek, vice president of industry, labour and economics at the Center for Automotive Research: "I don't see any scenario in which Mexico wages go to US$16 per hour."

John Irwin contributed to this report.