Earlier this month Arent Fox published an article on the impact the Trans-Pacific Partnership could have on the auto industry. To read the article, click here.

Dateline: Washington, DC, September 23, 2015

By any standard, these are anxious times. For days, top negotiators from the Trans-Pacific Partnership (TPP) have been meeting in San Francisco and Washington, DC and taking up most of the cities' available hotel rooms So I write this latest edition of “Travels” from Washington, where it seems a deal is imminent and could be reached before the first snow storm hits Detroit this year.

As in every trade agreement, much is at stake. First, it’s size: a huge agreement covering 12 countries. Second: its long-term stamp on global trade rules, given the failure of the multilateral WTO Doha Round. Third: the impact on three of its members, the NAFTA neighbors, and how it pivots away from long established NAFTA rules. Even so, negotiations are confidential and little information has been made public, adding to the anxiety level surely felt in many boardrooms across North America.

The North American automotive sector, the pillar of every NAFTA success story for more than 20 years, has considerable skin in the game. Auto executives have long understood that the industry is changing, most notably in the trend to find economies of scale via fewer, but larger contracts between the suppliers and the supplied. This is very likely. But bigger contracts mean bigger risks with little room for the unknown. The TPP is one of those unknowns.

So let us break down what we do know. First is the size of the TPP and its impact on a global industry. The most recent list of the top 100 global OEM parts suppliers published by the Automotive News Data Center shows that of the 100 global companies, 62 are based in TPP member countries. Specifically, 30 have headquarters in Japan, followed by 24 in the United States, five in Korea, two in Canada and one in Mexico. A quick analysis of what these 62 companies produce is equally illustrative — simply put, they are making the automotive product line for the car of the future, everything from autonomous navigation to electronic control panels and beyond. Clearly, the automotive production platform has gone computerized on a global stage.

Second, the TPP rules are expected to dictate the cross border supply chains for a huge swath of the global platform for years to come, most especially if China decides it wants part of the action. Given the failure of the multilateral WTO Doha Round, this regional pact could become the framework for a spider web of individual agreements around the world. And what of the myriad of bilateral agreements already signed by Ottawa, Washington, and Mexico City before and since 2008?

Mexico and Japan announced an agreement in 2011 which accelerated the removal of import tariffs on a host of import products, including auto parts from Japan. One of the goals of the Mexico-Japan pact was to restore the competitiveness of Japanese companies in the Mexican market. A year later, in 2012, Washington signed a trade deal with Korea and Ottawa finalized its own accord with Korea in 2015. These agreements are hardly one size fits all. They are all different and some contain critical provisions important for the future of the North American automotive sector Some of these include trade remedy rules commonly known as “snap back” provisions that serve to protect a domestic industry against import surges from another party in the agreement. Furthermore, each imposes varying calculation methods establishing import transaction value and tariff elimination phase-out periods.

Third, while 26 of the top global OEM parts suppliers have actual headquarters in one of the three NAFTA countries, one can safely assume that many, if not most, of the 100 companies Related People David R. Hamill Birgit Matthiesen Related Practices International Trade Canada-US Cross Border Business Affairs Alerts by Criteria Share Firm Deals & Cases People Practices & Industries Newsroom What are you looking for? Search ALUMNI CAREERS CONTACT have plant locations in North America. By all accounts, the United States remains the most attractive consumer market for auto parts and assembly operations. This has not gone unnoticed. In fact, Japan has made it very clear that one of its prime objectives in the TPP is to gain expanded access to the North American market. As noted above, the TPP will likely change how NA companies have supplied auto assembly operations in each of the three NAFTA countries. This is where the rubber hits the road (pun aside). In the NAFTA, companies importing light vehicles to each other must demonstrate that at least 60 percent of the component parts are “made" in a NAFTA country Automotive parts manufacturers have a slightly higher standard — 62.5 percent of their parts must be NAFTA eligible These thresholds are not simply numbers that can be shifted to suit one OEM or one Tier Two supplier. They are the highly complex formulas imposed on the North American auto sector for more than two decades that have dictated what companies produce, for whom, and from where.

Negotiators for the Pacific pact want to conclude talks by the end of this year. They must be tired of the wrangling, as they have been meeting since 2008. The final agreement text has not been made public nor will it be until the last negotiator books his or her flight home. Meanwhile, corporate managers and their workforce must keep assembly lines rolling. And each week that passes, these same business leaders are faced with enormous investment decisions involving plant expansions and product capacity. Long-term contracts between the OEMs and suppliers can’t or won’t wait to be signed and new technology products will keep breaking out into the marketplace to build the car that today’s consumer demands When the ink is dry on this newest trade pact, executives throughout North America will be forced on a sharp learning curve to understand what the agreement holds and what the new rules will mean for their company and shareholders.

The stakes are high. The rules are complex. The risks are real