Congressional Research Service

NAFTA and Motor Vehicle Trade Congressional Research Service

Motor vehicles and vehicle parts accounted for more than 20% of the total value of U. S. merchandise trade with Canada and Mexico in 2016, making them the largest category of manufactured products traded among the United States, Mexico, and Canada. Since the North American Free Trade Agreement (NAFTA) took effect in January 1994, the vehicle supply chain has become fully integrated, with parts manufacturing and assembly in all three countries. On May 18, 2017, the Trump Administration notified Congress of its intent to renegotiate NAFTA. In consequence, the 115th Congress will likely address numerous issues related to NAFTA and the North American motor vehicle industry. NAFTA has contributed to a large increase in trade in vehicles and auto parts within North America. Since 1994, Mexico has grown to become a major location for vehicle and parts manufacturing, while production in the United States and Canada has remained fairly steady, except during recessions. In addition to NAFTA trade liberalization commitments, growth of the Mexican vehicle industry was assisted by unilateral Mexican measures that removed restrictive trade and investment barriers, as well as Mexico's lower labor costs, the government's investment in training engineers and technicians to operate and manage motor vehicle plants, and numerous free trade agreements that give Mexican vehicles and parts tariff-free access to countries where U. S. exports face a tariff. In 2016, the United States had a motor vehicle trade deficit with both NAFTA partners, a deficit in vehicle parts trade with Mexico, and a surplus in vehicle parts trade with Canada. A topic in the renegotiation of NAFTA may be rules of origin, which determine which products qualify for the benefits of the agreement. NAFTA requires that 62.5% of a vehicle's net cost and 60% of the cost of parts originate in the NAFTA region in order for those products to have duty-free access to the United States. This is the highest such requirement for motor vehicles of any U. S. trade agreement. In general, vehicle and parts manufacturers support retaining the current rules of origin, whereas the United Auto Workers union seeks to require a higher percentage of regional content, which it believes would reduce the share of parts produced in non-NAFTA countries. The Trump Administration announced its negotiating objectives for NAFTA renegotiation on July 17, 2017, but it has not enumerated negotiating objectives specific to the automotive industry. However, some of its stated goals are consistent with recommendations of auto industry and union representatives, including updating customs procedures, promoting greater regulatory compatibility within the NAFTA region, improving intellectual property protection, improving labor and environmental provisions, and deterring currency manipulation.