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Declining U.S. Content in NAFTA Imports Shows Rule of Origin Deficiencies, Ross Says

Wednesday, September 27, 2017
Sandler, Travis & Rosenberg Trade Report

The share of U.S.-produced content in manufactured goods imports from Mexico and Canada has “eroded significantly” since NAFTA was implemented in the mid-1990s, according to a new Commerce Department report. Commerce Secretary Wilbur Ross said the report highlights the need to modify the NAFTA rules of origin to promote U.S. manufacturing and lower the U.S. trade deficit.

Using data from the Organization for Economic Cooperation and Development, the report states that the share of U.S.-produced content in manufactured goods imported from Mexico was 15.7 percent in 2011, down from 26.1 percent in 1995 (and 27.9 percent in 2000). Over this period the share of content from East and Southeast Asia rose from 6.4 percent to 13.9 percent (including an increase from 0.3 percent to 6.1 percent for China) and the European Union’s share expanded from 5.1 percent to 6.6 percent. Similarly, the share of U.S. content in imports from Canada fell from 20.9 percent in 1995 (and 22.5 percent in 1998) to 14.7 percent in 2011, during which time East and Southeast Asia’s share rose from 4.8 percent to 6.4 percent (including an increase from 0.3 percent to 2.6 percent for China) and the EU’s grew from 4.6 percent to 5.6 percent.

This pattern is also seen in motor vehicles, the top U.S. import from its NAFTA partners, where the share of U.S. content fell from 18.7 percent in 1995 (and 20.2 percent in 1998) to 11.7 percent in 2011. The share of Canadian content fell from 20.3 percent to 10.1 percent but Mexico’s share increased from 7.4 percent to 13.1 percent. East and Southeast Asia’s share was up slightly from 33.8 percent to 34.1 percent but China’s share jumped from 0.6 percent to 7.3 percent and the EU’s share rose from 16.7 percent to 21.7 percent.

The report also finds that the share of total NAFTA (Canadian, Mexican, and returned U.S. value-added) content in U.S. imports of manufactured products declined from 27 percent in 1995 to 22 percent in 2011. China’s share grew from three percent to more than 15 percent but East and Southeast Asia’s share declined from 37 percent to 35 percent as a result of lower shares for Japan and, to a lesser extent, Taiwan.

Ross said these numbers show that the existing NAFTA rules of origin, which “were intended to restrict non-NAFTA content in final goods,” are not working. It is particularly troubling, he added, that the decline in U.S. content in imports from Mexico and Canada “is largely being absorbed by non-NAFTA trading partners,” which saw their share rise from 14 percent to 27 percent and from 12 percent to 21 percent, respectively. While the data used in the report is only available through 2011, Ross said, “there is no reason to think that the situation has improved since then.”

With U.S. companies thus “not benefiting [from NAFTA] nearly as much as once believed,” Ross said, two of the U.S.’ major objectives in the NAFTA renegotiation are to increase the total NAFTA content requirement and expand the U.S. share of that requirement, especially in autos and auto parts. This sector is particularly important because it accounts for the “vast majority” of the U.S. goods trade deficit with Canada and Mexico, which Ross said “has gutted American manufacturing, killed jobs, and sapped our wealth.” Revising rules of origin is “just the beginning” of the process to fix those problems.

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