U.S. Trade Representative Robert Lighthizer is set to attend this week’s World Economic Forum in Davos, Switzerland, as are Canadian Foreign Minister Chrystia Freeland, Mexican Economy Minister Ildefonso Guajardo and, of course, President Trump, who will address the conference. At the top of the agenda of the annual gathering of the world’s financial elite will be ongoing threats to globalization and the increasing trend of countries across the globe to give in to the temptation to turn inward.
Though the Davos gathering will surely draw more attention, a more consequential meeting is already underway in Montreal, where trade negotiators from the United States, Mexico, and Canada have launched the sixth formal round of renegotiations of the North American Free Trade Agreement. Given that this round may prove crucial to NAFTA’s ongoing success, it’s worth highlighting how valuable the agreement is to the increasingly integrated North American economy.
The proposal also would require that 50 percent of all content come from the United States, which is a nonstarter for Mexico and Canada. In practice, rather than increasing domestic content, the change likely would drive more production abroad, as manufacturers would prefer to pay the 2.5 percent most-favored nation tariff rather than comply with costly new rules of origin.
Much to the president’s delight, Toyota and Mazda recently announced that their joint venture will build an automotive plant in Huntsville, Ala. The $1.6 billion foreign investment by the automakers (which will be added to the trade deficit, but never mind that) is estimated to create 4,000 jobs; the plant is slated to open in 2021 and would be capable of producing 300,000 automobiles a year.
Surely, this will trigger the creation and expansion of suppliers close to Huntsville. But not all component parts for the Toyota Corollas rolling off the line will be produced in Alabama, surrounding states, or even in the United States, and nor should they be. The notion that all component parts of finished products like automobiles can and should be made domestically is outdated and unworkable in today’s tightly integrated global supply chain.
Dan Anthony of the Trade Partnership, a D.C.-based economic research firm, noted in a recent series of tweets that, based on 2016 Census Bureau data, Alabama is the fifth-largest importer of auto parts and the third-largest exporter of finished automobiles among U.S. states. Alabama also ranks first in the country in the share of its total imports that were auto parts and first for the percentage of its exports that were finished automobiles. Alabama is not too dissimilar from South Carolina and Tennessee, which together serve as the beacons of growth in automotive manufacturing in the South.
But what makes this growth possible? At its core, America’s automotive manufacturing competitiveness is dependent on complex and integrated supply chains that have developed as a result of trade liberalization generally and NAFTA in particular. Lowering tariffs has helped facilitate the growth of trade, but such growth would have been impossible without reliable transportation of the goods necessary to ensure seamless supply chains. Some cars move across the Canadian and Mexican borders as many as eight times during the assembly process.
A major component of integrated supply chains is freight rail. A significant proportion of the component parts that arrive at U.S. automotive plants come by rail. When finished automobiles roll off the assembly line, they are loaded onto rails and shipped across the country or into Mexico and Canada.
NAFTA can and should be modernized. For example, in light of the rise of the Internet and e-commerce, adding a chapter to cover digital trade — similar to the provisions adopted by the three NAFTA nations during negotiations over the now-jettisoned Trans-Pacific Partnership — would be a good step. But the most important thing American trade negotiators should do in Montreal is to drop the misguided demand for stricter rules of origin. Doing so will ensure the success of the newly announced Toyota and Mazda plant in Huntsville, and the logistics network that made it possible.
Image Credit: Ronnie Chua