NAFTA, the US Trade Policy, and the North American Automotive Industry: A Look Back at 2017 and What is Ahead in 2018
Plain and simple, 2017 was a tumultuous year for the international trade community. And no industry has experienced this more than the North American and global automotive industry.
Wherever an automotive company is based – in the United States, Canada, Mexico, or outside North America, last year was the year of the roller coaster, with steep ups and downs and fast approaching blind turns occurring along the way. And the ride continues for 2018.
2017: The Year in Review
The President’s early and frequent promises to “Make America Great Again” took clear and early shape in what would become the Administration’s “America First” approach to policy – from economic strategy to foreign affairs.
In his Inaugural address to the nation on January 20, 2017, President Trump included trade policy when he promised that “every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families.” And only three days later, on January 23, the Administration pulled out of formal negotiations of the 12-member Trans-Pacific Partnership, or the TPP. The rest of the year was no less eventful.
Closer to home, the White House wasted no time to quickly turn its attention to the 23-year old NAFTA. At the time of this writing, five negotiating rounds have been concluded and negotiators still hope to finish their work by March 2018.
While there has been much media reporting on these rounds, no official text has yet been released to the public. What has been published are the Administration's NAFTA negotiating objectives released in July. These goals included a stated aim to “ensure the rules of origin incentivize the sourcing of goods and materials from the United States and North America.” A few months later, in November, those objectives were amended to stress the US negotiating objective to incentivize production in North America, as well as specifically in the United States. (italics ours)
Trade Enforcement as a Priority
Meanwhile, in April, President Trump launched separate “self-initiated” trade investigations on imports of steel and aluminum under Section 232 of the Trade Expansion Act of 1962, which authorizes such an investigation of imports if they jeopardize the national security interests of the United States. These “232” investigations are rare – the last one initiated was in 2001. By statute, the US Department of Commerce has 270 days in which to conduct their review, or January 2018.
For this Administration especially, trade liberalization is one side of the policy coin. The other is trade enforcement. In May of 2017, this was made abundantly clear with the release of the President’s FY 2018 budget request, particularly his funding requests for the US Customs and Border Protection.
In his submission, the President asked Congress for over $16.4 billion for FY 2018, an increase of almost $3 billion from the previous year – a nearly 20 percent increase. Much of that increase can be expected to be dedicated to trade enforcement activities.
World Trade Organization
Looking globally, in September, the US Trade Representative (USTR) Robert Lighthizer made a brief appearance before the World Trade Organization, or WTO. The WTO dispute settlement system, he said, is “deficient” and has often ruled in favor of free trade that overlooks details of a trade agreement.”
Speaking before the organization, USTR noted that "[w]e need to clarify our understanding of development within the WTO. We cannot sustain a situation in which new rules can only apply to a few and that others will be given a pass in the name of self-proclaimed development status."
These statements not only raise questions on US future commitments to the WTO, but also shed light on how the US will approach the negotiation and enforcement of other international trade arrangements to which the US is a party.
US–Korea Trade Agreement (KORUS)
In October, Lighthizer announced that the United States and South Korea had agreed to re-negotiate the five year old US–Korea bilateral trade agreement (KORUS), another US trade pact with significant automotive provisions. Lighthizer stated: “I initiated Joint Committee discussions at the direction of the President to improve outcomes under this agreement for all Americans. I now look forward to intensified engagement with Korea in an expeditious manner to resolve outstanding implementation issues, as well as to engage soon on amendments that will lead to fair, reciprocal trade.”
From these unvarnished statements, it is a good bet that KORUS will be the next US trade pact arriving on the negotiating table.
Which brings us to 2018…
2018: Ringing in the New Year – A Loaded First Half
On all fronts, the international trade developments that commenced last year and gained momentum throughout 2017 will individually and collectively present ground-changing impacts for the North American and global automotive industry – from auto assemblers to auto suppliers at all tiers. And much of this action is likely to occur in the first half of 2018.
NAFTA negotiators will have a short holiday respite before they head to Montreal in late January for Round Six. It remains to be seen whether talks will be concluded by March but if so, readers can expect an aggressive legislative and regulatory calendar in all three capitals to implement the new NAFTA text and its various chapters.
In Washington, this will take the form of possible Congressional hearings and legislative action, as well as presidential proclamations. Following ratification of the NAFTA changes, the Executive Branch will soon thereafter publish rulemaking to bring into force many of the various changes. This post-ratification stage in any new NAFTA will be very important for readers of this post as this may be the first opportunity for the trade community to clearly understand the US interpretation of the new NAFTA and how US agencies will be directed to enforce the agreed-upon text. It will also be the first opportunity for industry leaders to “shape” US interpretative rules and policy decisions.
It is widely believed that for the NAFTA renegotiations to be successful, they must be concluded by the end of March, well before Mexican Presidential elections in July 2018 and US midterm elections in November. Furthermore, if NAFTA negotiations fail to reach conclusion by July 2018, Congress will be required to pass new Trade Promotion Authority legislation (TPA) to provide the Executive Branch continuing negotiating authority and/or launch new negotiations. Extending TPA could be problematic for many US Members of Congress, as many will be heading off to their various campaign trails in home districts.
Trade Enforcement in 2018
Assuming that Congress passes a FY 2018 spending bill for agencies such as Customs and Border Protection, new resources will be assigned to the task of trade enforcement. Specifically, these can take a number of forms, from “benign” requests from local CBP offices for import data to full blown and sweeping import audits. And a “new” NAFTA is certain to be high on the CBP trade enforcement priority list. Moreover, given the focus throughout 2017, the North American automotive sector should expect vigorous interest from CBP personnel as CBP itself will undoubtedly be under scrutiny from Congressional oversight committees keen on ensuring the agency adequately implements the White House trade goals.
In terms of the industry’s use of raw materials, such as steel and aluminum, a final decision from the US Department of Commerce is anticipated for January 2018. In the same vein, the US Department of Commerce will surely continue to actively pursue US trade remedy options for other commodities when a perceived threat to US economic, as well as national interests, is detected. The Section 232 investigations on imports of steel and aluminum imports launched in 2017 could signal a new template for US trade enforcement, one which was highlighted several times in the President’s National Security strategy of December 2017.
Other Free Trade Agreements: KORUS & T-TIP
Of the many trade agreements the US already has on the books, the KORUS ranks high in importance for the automotive industry. The KORUS rules of origin for this sector are equally intrusive as under the NAFTA, but they are not a mirror image. At the time of this writing, it has been announced that KORUS negotiators will begin “potential amendments and modifications” on January 5, 2018 in Washington. Meanwhile, the White House may continue its pursuit of a trade pact with the European Union (EU) known as the Transatlantic Trade and Investment in Partnership (T-TIP). Although T-TIP has dropped off the trade policy radar screen in recent months, a successful NAFTA renegotiation may rejuvenate interest by the US Administration in this proposed agreement.
With regard to KORUS and T-TIP, US trading partners will be closely monitoring US negotiating priorities and strategy in play during the NAFTA. As President Trump has made clear throughout 2017, his top trade priority is making the location of production jobs within US borders as attractive as possible. As trade negotiations continue through 2018, this priority is likely to remain paramount and NAFTA rules of origin will be the tools negotiators have in their arsenal.
As in many other industry sectors, the automotive industry in North America and beyond must plan for the future. Uncertainty and risks can be managed, but only to a certain degree. For global companies, this has become the new risk conundrum.
But for every company, uncertainty can also bring opportunities – a theme we have returned to throughout 2017. If the rules of international trade change, especially those determining product and input origin, a company may find some silver lining. These can take the form of unknown tariff revenue savings for the company itself and, when strategized correctly, can add a fresh look at the company’s competitive landscape.
Arent Fox’s International Trade group continues to monitor developments in the NAFTA renegotiations. A team of legal and non-legal professionals at Arent Fox LLP specializes in NAFTA and other free trade agreements. If you have any questions, please contact David Hamill, Birgit Matthiesen, or the Arent Fox professional who usually handles your matters.