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NAFTA Talks Stall Over Auto Standards

The fourth round of NAFTA negotiations appears to have stalled over negotiations around auto manufacturing, a quandary that could spell a significant economic blow to San Antonio and other U.S. car manufacturing hotbeds.

NAFTA Talks Stall Over Auto Standards
Sen. John Cornyn addresses NAFTA in San Antonio

U.S. Sen. John Cornyn’s subcommittee hearing in San Antonio last week, on the site where the original NAFTA was signed in 1993, showcased the benefits of NAFTA to Texas. The Border Trade Alliance spoke. The Texas Farm Bureau, Texas Association of Business and Texas Oil and Gas Association talked up trade. Even the Alliance of Automobile Manufacturers praised the current state of NAFTA.

“I believe NAFTA is working. Certainly it’s working for Texas,” Cornyn told reporters after the Senate Finance Committee subcommittee hearing on international trade. “When people say there are winners and losers in NAFTA, I’m wondering where those losers are. Maybe we need to hear more about that, to fix it. Certainly here in Texas, it is working.”

NAFTA has been a boon to San Antonio. Toyota Motor Manufacturing Texas’ assembly plant, where Tundras and Tacomas are built, was established in 2003 with a $2.4B investment. The plant, which employs 2,300 people, almost single-handedly re-energized the south side of San Antonio. It remains the jewel in the city’s economic crown, the one major industry landed after round after round of military base closures.

NAFTA Talks Stall Over Auto Standards
Toyota Motor Manufacturing, Texas

Now the Trump administration wants to increase the rule of origin from 62.5% to 85%. That means the majority of components that go into Toyota vehicles would have to originate in the United States rather than cross back and forth across the Texas-Mexico border. Toyota likely would face stiff tariffs if the proposed rule of origin succeeds.

“NAFTA contains the strictest automotive rules of origin requirements of any U.S. Free Trade Agreement, at 62.5%,” San Antonio Chamber of Commerce CEO Richard Perez said at the subcommittee hearing. “Any changes to the rules of origin could jeopardize our current production and lead to the unintended consequences of limiting consumer choice, raising costs, reducing U.S. jobs and increasing competition from other countries.”

Uncertainty around NAFTA already has the potential to be a chilling effect on the commitment to expand manufacturing in Texas, said CEO Tony Bennett of the Texas Association of Manufacturers.

"Most of my members are hitting on all eight cylinders right now, but that may very well change," Bennett said. "You start looking at this, sector by industry sector, and there's going to be a point where people push the pause button. Business does not like uncertainty with regard to NAFTA, and I can see a lot of boardrooms saying, 'Just hold off.'"

With March set as a hard deadline for agreement, the future of Toyota in Texas hangs in the balance, either under a renegotiated rule of origin or with an exit from the agreement altogether. Toyota has doubled production and tripled its workforce since it arrived in San Antonio, Perez said. That will take a significant hit if the rule of origin is increased to 85%.

"In my opinion and in their opinion, that goes away if we put these barriers in effect," Perez said. "If NAFTA goes away, the ability for free trade goes away. So now it costs more dollars to go back and forth, in a really substantial way. The production that we have today is going to have to go down. There’s really no doubt about it.”

NAFTA Talks Stall Over Auto Standards
Toyota's one millionth truck rolls off the assembly line in San Antonio

No one at the hearing disputed the fact NAFTA needs to be updated. As Cornyn noted, the digital economy is in full swing. Mexico’s energy economy was deregulated in 2013. Safety standards and regulatory cooperation could be clarified in an updated agreement.

Trump’s administration is focused on mounting trade deficits between the United States and both Mexico and Canada.

NAFTA is unbalanced in favor of other countries, Stephen Vaughn told the subcommittee. Vaughn is general counsel to the United States Trade Representative.

“We do enormous volumes of trade with countries like Japan, the United Kingdom, Germany and China pursuant to WTO rules, even in the absence of a specific free trade agreement with those countries,” Vaughn said. “Against this background, the purpose of an agreement like NAFTA is to create special rules to give certain countries unique access to this market, access that other countries lack.”

That special access should come with more, and better, access for American business, Vaughn said. Cornyn pressed Vaughn on the issue and later told reporters the deficit was the symptom of a problem rather than a problem that needs to be eliminated.

“The last thing you’d want to do is hurt Texas exports. It would make the deficit worse, not better,” Cornyn said. “To focus strictly on deficits, to the exclusion of everything else, to me, is too narrow. We ought to be looking at the entire package.”