If there’s one thing Americans understand, it’s cars.
[Leon Lazaroff| April 5, 2016 |The Street]
The U.S. auto industry, all but dead following the U.S. banking crisis of 2008, has largely recovered from the recession. Domestic auto production is breaking records, fueled in recent quarters by the declining price of gasoline. General Motors(GM – Get Report) and Chrysler, a division of Fiat Chrysler (FCAU – Get Report) , improved following government-bailouts while Ford (F – Get Report) managed its own restructuring by lowering production costs and making better cars.
The industry’s attitude on international trade has undergone changes, too. While automakers enthusiastically supported the North American Free Trade Agreement in the early 1990s, the same can’t be said for the Trans-Pacific Partnership, the sweeping trade agreement involving 11 mostly Asian countries, including Japan, Malaysia and Vietnam.
Ford, which actively pushed for NAFTA with Mexico and Canada 22 years ago, conspicuously opposes the TPP. The automaker’s high-profile opposition comes as all four leading candidates have also denounced the trade pact. Bernie Sanders and Donald Trump, of course, have been the most consistently vocal yet even Hillary Clinton and Ted Cruz, who both backed initial efforts to negotiate the Asian trade accord, say they don’t like it.
For a large exporter such as Ford to oppose a major trade agreement is “quite unusual, really quite unique,” Adam Hersh, a visiting fellow at Columbia University’s Initiative for Policy Dialogue, said in a phone interview from Washington.
At the root of Ford’s opposition to TPP are the Rules of Origin, which govern what percentage of a vehicle must be manufactured in a given trade zone to qualify for sale in that same region. NAFTA requires that autos and light vehicles must be able to show that 62.5% of its content was manufactured in the U.S., Canada or Mexico for sale in its three-country trade region with lower tariffs.
Yet as currently written, the TPP would require a much lower threshold, 45% for vehicles and as low as 35% for some parts. Japan wanted it low because so much of that country’s parts manufacturing takes place in China, which remains one of the world’s lowest-wage markets. Moving those facilities and related operations elsewhere would cost billions of dollars and require enormous changes to Japanese sourcing networks.
If the TPP is approved in its current form, Japanese carmakers would be able to continue to import parts from China, have them included in cars assembled in Mexico or another TPP country, without violating the treaty’s conditions.
Therefore, raw steel or aluminum can be imported from China to a TPP member country where it is pressed, drilled, stamped and glued, and suddenly it goes from being a 100% Chinese good to a 100% TPP product without any requirement that the importer adhere to the trade treaty’s labor and environmental standards.
“What this is doing is opening a backdoor for manufacturers outside of TPP to sell into the market,” Hersh said. “It doesn’t do anything to create the incentives for manufacturing to be retained within TPP member countries.”
The other TPP member countries are Singapore, New Zealand, Chile, Peru, Brunei, Australia, Canada and Mexico.
For Trump, Cruz, Clinton and Sanders, the impact of trade agreements on U.S. workers is one of the most volatile issues of the presidential campaign.
Clinton spent parts of March in the Midwest saying her decision to reverse an earlier favorable stand on the TPP was due in part to its lax rules of origin for automakers. An aide told The Washington Post that Clinton opposed allowing cars to be assembled and sold within the TPP zone mostly using parts made outside the region.
Sanders frequently cites a Tufts University study that projected U.S. job losses of 448,000 if TPP is enacted. Trump, who needs a strong showing in Wisconsin’s primary on Tuesday to quell talk that his campaign has lost momentum, told voters there that the TPP would make NAFTA “look like a baby, and Wisconsin will be hit so hard.”
In addition to the Rules of Origin issue, Ford is also pressing Congress to reject TPP on grounds that member countries, most notably Japan, manipulate their currencies.
Such manipulation can buoy Japanese exports while hurting sales from other countries — like the U.S. — inside the world’s third-largest economy, Stephen E. Biegun, Ford’s chief of international government affairs, argued in testimony before a congressional committee in January.
Keenly aware that the world’s fastest-growing auto market is Asia, Ford has called on the Obama administration to secure a “dispute settlement mechanism” that might make it easier to break into Japan’s all-but-closed domestic market, the largest in the world behind the U.S. and China.
Democrats led by Michigan Congressman Sandy Levin, who opposes TPP in its current form, have made similar calls on Obama trade officials to address currency manipulation.
“We can and will compete in any market around the world with Japanese manufacturers, but no manufacturer can compete with the Bank of Japan,” said Biegun, who warned the pact would add $50 billion annually to the U.S. trade deficit with Japan. “In TPP, the Japanese government made no meaningful concessions — and the U.S. government made no effort to make them do so.”
U.S. negotiators are said to be attempting to hammer out a side agreement on currency manipulation, but such a deal remains elusive. No country wants to give up its right to control its own monetary policy. Ford, meanwhile, has learned that even a Fortune 500 company with a global brand name has limits to its leverage.
“Even Google, big important companies, have been on the outside of these negotiations and haven’t been able to get the things that they see as important,” Hersh added. “So, Ford, although a major U.S. company, has not always had the ear of the U.S. negotiators.”