Newly released data from the Organization for Economic Cooperation and Development has allowed U.S. Commerce Department analysts to challenge the long-held perception that U.S. content in North American Free Trade Agreement (NAFTA) imports remain strong.
Newly released data from the Organization for Economic Cooperation and Development (OECD) has allowed U.S. Commerce Department analysts to challenge the long-held perception that U.S. content in North American Free Trade Agreement (NAFTA) imports remain strong.
According to Commerce’s report, released Friday, the OECD’s “Trade in Value-Added” (TiVA) data, which covers the period of 1995-2011, shows the share of U.S.-produced content in manufactured imports from Mexico and Canada declining from 26 percent in 1995 to 16 percent in 2011.
Over the same period, TiVA data showed that Chinese content in Mexican products imported into the United States under NAFTA rose to 6 percent in 2011, compared to just 0.3 percent in 1995. Overall content from non-NAFTA sources in Mexican products increased from 14 percent to 27 percent, Commerce said.
U.S. content in NAFTA products imported from Canada saw similar deterioration between 1995 and 2011, falling from 21 percent to 15 percent over that period. Chinese content in Canadian imports, meanwhile, increased to 3 percent from 0.3 percent, with the combined non-NAFTA content in these imports collectively increasing from 12 percent to 21 percent over that same period.
“The assumption was that American manufacturers of intermediate goods were big beneficiaries from trade with NAFTA, but with their share declining, American companies are not benefiting nearly as much as once believed,” Commerce Secretary Wilbur Ross said in a statement.
“Even more alarming is the fact that the most recent data available on value-added in trade is only through the year 2011,” he added. “The trend of Mexico and Canada using more non-U.S.-made parts and components may mean even more bad news for American producers.”
The Commerce report, “U.S.-Produced Value in U.S. Imports from NAFTA,” written by Anne Flatness and Chris Rasmussen of the Office of Trade and Economic Analysis, specifically highlighted a continued drop in U.S. content within the highly coveted NATFA motor vehicle trade.
“The non-NAFTA share of value in U.S. motor vehicles imports grew from almost 54 percent in 1995 to 65 percent in 2011,” the department analysts wrote, noting a particular increase in parts content from suppliers in the European Union.
The Trump administration said its call to raise the U.S. content requirements for NAFTA-produced products, particularly in auto manufacturing, is largely based on the existing trade agreement’s origin rules.
“Unfortunately, NAFTA rules of origin on automobiles listed the exact parts to which the rules of origin applied, and many of those parts are no longer used,” Ross wrote in an op-ed piece published in the Washington Post on Friday. “Another reason is that the rules include a concept called substantial transformation, which means that if further processing of a non-NAFTA item is done by a NAFTA partner, the non-NAFTA items are ‘transformed’ and are deemed to have been produced in the United States, Canada or Mexico.”
Some analysts are warning against tinkering with the NAFTA origin rules to raise U.S. content level requirements for NAFTA products, particularly in the auto sector, arguing that the move could backfire against an already strong North American industry sector.
“Tightening NAFTA’s rules of origin on automobiles either by raising the NAFTA-wide threshold or by introducing a U.S.-specific content requirement, wouldn’t bring the production of these components back onshore,” Carlos Gomes, a senior economist at Scotiabank, wrote in a Sept. 21 report. “Instead, such actions would likely reduce the competitiveness of North American auto production, push more production to Mexico rather than into the U.S., and nudge auto producers to conduct some of their intra-North American trade under most-favored-nation (MFN) tariffs rather than bothering to qualify for duty-free access under NAFTA—thereby raising their costs further.”
Gomes also highlighted in his report the importance of the already “highly integrated” North American auto supply chain to U.S. auto industry employment, which is expected to increase 6 percent per year.
“Any disruption to the integrated supply chain that has been achieved under NAFTA could challenge the outperformance of the North American auto industry, including potential job losses for some of the nearly 2 million auto industry positions in the United States, Canada and Mexico,” he said.
The NAFTA origin rules and content requirements are expected to be hot button issues during the third round of NAFTA renegotiation talks between the United States, Mexico and Canada, which are scheduled to get underway this Saturday in Ottawa and last through Sept. 27.
OECD data adds fuel to NAFTA origin rules debate
