Conjoncture // November 2017
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Tougher rules of origin
As a result, the changes could prompt carmakers to flout the rule or
move production outside of North America, so that they can use
cheaper components, even if they have to pay, in both situations,
In 1994, NAFTA defined the rules of origin that are used to determine
whether a product can benefit from preferential treatment. In particular,
the rules are designed to ensure that a product traded within NAFTA is
not a product that has come from a third country and undergone minor
transformation, or that has been imported from a third country by the
NAFTA member that has the lowest customs duties. Currently, a
product originates in a party’s territory if it is entirely obtained or
produced in the territory of one or more parties, or if, through
transformation, it has changed its classification within the Harmonized
System (HS) of the World Customs Organization. In other words, its
classification must be different from that of the non-originating material
used to make it. The extent of the required transformation varies
according to the product, but it may need a change of chapter, identified
by the first two digits of the six-digit HS nomenclature. That would
require substantial transformation of non-originating products. Aside
from that requirement, a product may need to have a minimum regional
value content. As a result, rules of origin vary by product, which
explains their complexity and the scale of administrative costs involved
when companies want to obtain a certificate of origin. In the auto sector,
the required regional value content for a vehicle may be as much as
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customs duty of 2.5% when selling their vehicles in the USA . A
company will be even less inclined to produce components in North
America if the price of components made in a third country is lower than
that of components made in NAFTA countries, and if the gap between
the customs duty on the final product and the preferential tariff is small.
The rules of origin could therefore have the opposite effect on US
production from the one the US administration is seeking, especially
since they could affect competitiveness in other sectors. The US
approach could also prompt Canada and Mexico to take similar action,
demanding a change to the rules of origin when a product or type of
product gives rise to a large trade deficit.
All of these areas of disagreement could slow the pace of the talks, at a
time when there are certain major events scheduled for 2018. Mexico
will hold a general election in July 2018 and the USA will hold elections
for all seats in the House of Representatives and a third of seats in the
Senate in the November 2018 mid-term elections. These elections
could make life harder for Donald Trump, because of the procedure that
needs to be followed and the timeframe involved for a trade agreement
to be approved by Congress. This fast-track Trade Promotion Authority
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2.5% of the net cost 34 . That means that 62.5% of a vehicle’s
components must come from NAFTA members, and only components
that fully originate from NAFTA members are included in that proportion.
(
TPA) procedure, after which Congress will accept or reject the
agreement negotiated by the administration without being able to table
amendments, involves certain requirements to be met before and after
an agreement is reached. Once the President has reached a trade
agreement with the USA’s partners, it takes 105 days before the text
can be officially presented to Congress, during which time it is subject to
various examinations. Then, it takes another 75-90 days before it can
be put to a vote in Congress. In addition, this legislative procedure,
which gives the US government extended powers regarding trade
negotiations, expires on 1 July 2018 and will have to be prolonged by
the President with the agreement of both houses of Congress until 30
June 2021.
The USA wants to change these rules of origin in order to support its
national production. It wants goods produced in the USA to include a
greater proportion of goods produced in North America and the USA. It
has the auto industry particularly in its sights, given the large portion of
the US trade deficit attributable to it. The USA is apparently demanding
that 85% of a vehicle’s components come from North America and 50%
from the USA.
However, it is not clear how changing the rules in this way will affect
production in North America and the USA. The changes would generate
additional costs. Companies could have to bear major costs in order to
overhaul their production lines, which are already complex.
The USA’s demands should be seen in the light of the current
Competitiveness damaged by the introduction of customs duties
composition of vehicles produced in North America. Revamping the
rules of origin in this way could therefore damage the competitiveness If NAFTA is abolished and in the absence of bilateral agreements, trade
of companies operating in North America. It would make it even harder between NAFTA members would be governed by WTO rules. Members
for them to purchase components from the most competitive suppliers.
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NAFTA members must comply with the most-favoured-nation clause, which means that
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Net cost, which is the method favoured by NAFTA, is the total cost less sales promotion,
a WTO member cannot discriminate between its trade partners. In other words, customs
duties levied on a given country's imports cannot be higher than those levied on imports
from the country with most-favoured-nation status.
marketing and after-sales service costs, royalties, shipping and packaging costs and
interest costs.