At Montreal talks, Canada proposes new approach to breaking NAFTA auto gridlock

Theglobeandmail.com
Jan. 24, 2018
By Adrian Morrow

Canadian negotiators have begun presenting proposals to jack up the amount of North American content in vehicles made in the NAFTA zone, in a bid to reach a deal with the United States on one of the key sticking points in the overhaul of the continental trade pact.

And Ottawa has joined with Mexico City to pitch a series of "periodic reviews" of the North American free-trade agreement as an alternative to the U.S. demand that the pact be subjected to a "sunset clause" that would automatically terminate the deal in five years unless all three countries agreed to extend it.

These discussions on potential compromises unfolded at the sixth round of NAFTA talks in Montreal on Wednesday, said three sources with knowledge of the confidential negotiations.

Canada is hoping that by suggesting ideas to boost the amount of North American content in cars and trucks, it can persuade the United States to drop its demand that all vehicles made in Canada and Mexico contain at least 50 per cent U.S.-made content. Discussions on the so-called "rules of origin" that govern content in products traded between NAFTA countries are scheduled to run through Friday, according to a schedule obtained by The Globe and Mail

The auto proposal represents the Trudeau government's most serious attempt so far to break the impasse over the Trump administration's protectionist NAFTA demands.

But it is far from clear Washington will soften its stand. Observers warn Canada and Mexico's decision this week to enter a new free-trade deal with Asian countries – a pact that contains less stringent auto content rules than NAFTA - complicates their efforts to placate the United States and reach an agreement.

As The Globe revealed earlier this month, Canada's auto proposal would calculate the percentage of required North American content on the total value of a vehicle. The current system instead uses a list of which content counts toward the requirement. The Canadian method would ensure such things as software development count toward the content requirement, because the current list does not include many high-tech auto components developed after NAFTA's signing in 1994.

The United States is demanding the amount of required NAFTA-zone content be raised to 85 per cent from 62.5 per cent. One source said Canada will not be presenting proposed percentages, but only focusing on the calculation method.

The Canadian proposals are being presented as ideas for discussion and not as formal counteroffers, allowing Ottawa to suss out Washington's willingness to compromise without making any formal concessions.

Flavio Volpe, president of Canada's Automotive Parts Manufacturers' Association, said he thought the United States would find something to like in the Canadian pitch. As the tech sector becomes an increasingly large part of the auto industry - given the rise of self-driving cars - Mr. Volpe said these proposals will help keep future jobs from moving to China.

"I'm optimistic … a real sense of potential optimism that we can have a good discussion, we can come up with good commercial movement," he said outside the talks.

Mr. Volpe, however, argued Canada and Mexico had undermined the negotiations by signing on to a revived Trans-Pacific partnership a day earlier. "In TPP, we opened a back door for nine other countries at a 45-per-cent content level [for vehicles made in the TPP zone].

"If you only have to count 45 per cent, it means the other 55 can come from Mars," he said.

U.S. Commerce Secretary Wilbur Ross earlier in the day told MSNBC he wanted to make high-tech components count toward the content requirement. "Those rules are at best archaic and at worst, we don't feel they accomplish the purpose they were intended to, which was to facilitate production within NAFTA," he said in Davos, Switzerland.

Daniel Ujczo, an international trade lawyer in the Columbus, Ohio, office of Dickinson Wright, said Canada's pitch could be the starting point for a deal. But to convince Washington to back off its U.S. content requirement, Ottawa and Mexico City will have to alleviate its fears that TPP will lead Asian auto parts to pour into the United States.

"I think this is a good first step. I just don't know how you get past it and get rid of the 50 per cent," Mr. Ujczo said in an interview.

"They have to show the U.S. how they're going to bolt the back door."

Working in Canada's favour is extensive pro-NAFTA lobbying by U.S. business, including the American auto industry.

In a letter this week to U.S. Trade Representative Robert Lighthizer, the Motor & Equipment Manufacturers Association said a new NAFTA should "include research and development, engineering and designing, and software development expenditures in regional value content calculations."

The United States' proposed sunset clause is another barrier in the renegotiation. Canada and Mexico instead favour a process under which the NAFTA countries can regularly review the pact and make changes, but without the threat of the deal terminating if the three parties fail to agree.