Earlier this month, the NAFTA negotiating teams met in Washington DC for their fourth round of talks. After what has been reported as "intense" discussions over a key negotiating sector – the North American automotive industry – the three teams agreed to return to their capitals and meet again in early November.
Meanwhile, automotive executives, their shareholders, and their investors are left to "read the tea leaves" for what could be very turbulent times ahead. Amidst this climate of uncertainty, they must still run their companies and sign supplier agreements, while parts manufacturers must pursue their OEM commitments.
What we know so far is that all three countries remain committed to their goal to conclude negotiations as soon as the end of this calendar year or early 2018. This time frame would be on record as one of the most fast-paced set of trade negotiations in modern times. We also know that NAFTA trading partners, e.g. those outside of North America, are watching developments closely in light of the Administration’s commitment to re-assess each of their free trade agreements currently in force. For automotive executives, this would be the US FTA with South Korea.
What we can surmise so far is what has been widely reported in public statements, press conferences, and media reporting – that the most critical rules and sourcing calculations used by the automotive sector since the 1994 NAFTA are now up for change.
Not “tweaked,” not “modernized,” but substantially altered.
Because the text of the US proposal is not made public, we do not know for certain its contents. However, there appears to be general consensus in media reports that the proposed rule changes include a five year sunset review, a significant increase in the NAFTA regional value content requirement of up to 85%, a 50% US domestic production provision, and a broader application of the NAFTA’s “tracing” rules. Separately, any one of these could tangibly and almost immediately upset a company’s production plan. Together, they could redraw the NAFTA automotive map.
Readers of this post know that Arent Fox LLP has been closely watching these developments since January 2017 when the three NAFTA leaders announced their intent to pursue a review of the now-twenty four year old NAFTA. It is our opinion that this one month pause in the negotiations signals a continued commitment to the NAFTA pact. But like our readers, we are not waiting for the final bell to ring. Instead, we are working with corporate leaders to best position their companies for these possible rule changes and prepare tailored contingency scenarios.
Every executive knows that in times of rising business tensions, having real time facts and data-driven analysis can mean the difference between being left at the starting gate and running ahead of the competition.