Wall Street Journal: "Auto-Parts Dispute Taps the Brakes on Pacific Trade Deal"

September 04, 2015


A fight over how cars are assembled is pitting North America’s auto industry against Japan’s in a dispute now holding up a major trade agreement spanning the Pacific.

[by William Mauldin and Dudley Althaus | September 3, 2015 | WSJ ]

The spat over which cars should be eligible for duty-free trade surfaced during high-level talks in late July that failed to wrap up the 12-nation Trans-Pacific Partnership. The auto impasse is the most recent complication to finishing the TPP talks, along with dairy trade and the intellectual-property protections afforded to biologic drugs, as well as the election season in Canada and the approaching campaigns in the U.S. and Japan.

Japanese auto makers rely to a larger degree than their North American peers on components produced in other countries, such as China and Thailand, outside of the proposed TPP bloc. They don’t want the agreement to disrupt that supply chain.

The Mexican auto industry is leading a campaign to ensure cars freely traded within the TPP have at least half their components originating in the bloc. American labor groups and some suppliers, worried about more jobs being moved overseas, also favor tighter rules in the TPP.

In the middle of the dispute are U.S. officials, who have been negotiating intensely with Japan for more than a year on auto and other issues but who also don’t want to upset American workers or North American neighbors.

The stakes are highest for Mexico, which uses existing free-trade agreements to attract investment and boost production.

“We are very worried about this,” said Eduardo Solis, executive director of the Mexican Automotive Industry Association, known as AMIA. As leading suppliers of cars and parts to the giant U.S. market, Mexico and Canada don’t want a Pacific deal to shift trade advantages to Japan.

The car and parts dispute highlights how the two-decade-old North American Free Trade Agreement has built an automotive powerhouse within the U.S., Canada and Mexico.

“We’re going to lose what we have gained under Nafta,” said Oscar Albin, executive director of the National Auto Parts Industry, Mexico’s industry association. “We’re going to lose production of auto parts and the United States is going to lose the prime materials markets. This is a grave danger.”

Mr. Albin and other industry officials are pushing for at least a 50% content rule for auto parts under the TPP. With some 700,000 employees and export sales of $60 billion—mostly to the U.S. and Canada—the auto-parts industry serves as a linchpin of Mexican manufacturing.

U.S. and Japanese officials say the rules are complicated and that percentages in Nafta don’t translate easily into the so-called rules of origin under negotiation in the TPP.

“We are working toward a strong rule of origin in TPP that meets our objective of making sure that TPP benefits go to TPP countries and that promotes a vibrant domestic automotive industry and the jobs it supports,” said Matt McAlvanah, a spokesman for the U.S. trade representative’s office.

Detroit auto makers in general prefer rules of origin somewhere in the middle, because strict rules could crimp their reliance on global supply chains, while lax rules open Detroit up to increased competition from Asia, said an executive at one U.S. auto maker.

But labor groups that represent a swath of the industry, including auto-parts workers, want tight rules to prevent the bulk of auto components from being produced in countries, including China, that aren’t preparing to sign on to the labor and environmental standards of the TPP.

“It will cost jobs,” AFL-CIO President Richard Trumka said Tuesday in Washington. Mr. Trumka said official consideration of reportedly lax rules of origin is “ludicrous,” and he sent a letter last month to the U.S. trade representative, Michael Froman, to push for stricter rules.

For Mexico, loose rules of origin in the TPP could undermine its efforts to push into the luxury car business and give Japan’s producers a leg up, industry experts say. “We could see very cheap Toyotas or Lexuses arriving in the U.S. with lots of Chinese parts, said Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich.

Lax rules of origin would also undermine the Obama administration’s argument that the TPP would establish rules of the road that put pressure on China’s dominance of the region. “If the aim is to build a trade bloc to counter the Chinese, how do you open up this trade bloc to massive imports from the Chinese?” Mr. McAlinden said.

A spokesman for the Washington office of the Japan Automobile Manufacturers Association declined to comment, citing differing views among its members. A Japanese official said Tokyo backs allowing a greater percentage of parts from outside the bloc in order to defend auto makers’ existing supply chains, not to encourage outsourcing to China.


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