Fresh signs of optimism as NAFTA talks resume

DETROIT — Call it self-protection or shrewd maneuvering.

Either way, domestic investments by the auto industry over the last year seem to have created a dynamic that could give President Donald Trump political room to declare victory on domestic job creation and back away from a threatened withdrawal from the North American Free Trade Agreement.

That would allow professional trade negotiators and industry advisers to refocus on modernizing the 24-year-old agreement as the next round of talks gets underway this week in Montreal.

Following the enactment of tax cuts, which the president claims will spur economic growth and hiring, there is growing confidence among auto industry leaders that Canada and Mexico can strike a deal with the U.S. that doesn't harm the integrated, regional production platform critical to their global competitiveness. For the first time, they see signs Trump's team might bend on its most hard-line positions, including higher thresholds for U.S. content and tighter tracing of where parts originate.

Given the president's itchy Twitter finger and his record of vacillating in the midst of negotiations, no agreement is safe until the ink is dry. And reports last week suggested that the administration is frustrated by what it sees as intransigence from Canada and Mexico and remains prepared to scotch the deal.

But the mood is decidedly more upbeat than it was even six weeks ago, when industry officials seemed resigned to NAFTA's downfall.

"I think there's some flexibility from the U.S. perspective" as partner nations indicate willingness to address the administration's demand for higher domestic content, as long as the regional content value isn't tilted by rule to the U.S., Flavio Volpe, president of the Automotive Parts Manufacturers' Association in Canada, said in an interview last week on the sidelines of the Automotive News World Congress here.

Volpe, who has become a key counselor for the Canadian government's negotiating team, put the chances for success at 90 percent, saying the talks have been aided by quiet meetings among professional trade negotiators without the presence of political leaders over the last month.

Oscar Albin, Volpe's counterpart with Mexico's auto-parts trade group, said there is just a 25 percent chance that NAFTA talks will fall apart, citing discussions with Mexico's economics minister, Ildefonso Guajardo Villarreal.

This month, Trump signaled that the administration may be willing to extend negotiations after Mexico's upcoming presidential election. Volpe suggested that would open the door to postpone talks until after the U.S. midterm congressional elections in November.

"I think with passage of the tax reform package, some pressure is off the White House," Volpe told the World Congress. Trump "has got some good news. He doesn't need to use NAFTA to punish" a trading partner to demonstrate that he's helping middle-class workers and creating jobs.

General Motors CEO Mary Barra also expressed optimism that NAFTA will get updated without disruption.

"I think with the dialogue I'm having, I'm pretty [sure] that there will be modernization. There will be some changes, but they'll be changes we planned [for] and are very well-suited to react to," she said last week at the 2018 Deutsche Bank Global Auto Industry Conference, adding that GM is "completely aligned" with the administration on job preservation.

Trump has championed the cause of displaced manufacturing workers in the heartland and decried trade deals such as NAFTA for making it easy for companies to outsource production to low-cost countries such as Mexico. Fiat Chrysler Automobiles' announcement this month that it is moving Ram production from Mexico to Michigan and the decision by Toyota and Mazda to invest $1 billion in a joint assembly plant in Alabama give the administration two victories to claim for U.S.-based manufacturing in states that he won in 2016.

Detroit automakers have been making moves that help insulate them against a potential NAFTA restructuring or unraveling and ensure that their most profitable vehicles don't get caught in a trade war between the U.S. and Mexico.

Ford is the most prepared for any unexpected changes. It shifted production of its heavy-duty F-series trucks from Mexico to Ohio in 2015, making it the only Detroit automaker to domestically produce 100 percent of its pickups sold in the U.S. That strategy will continue with the 2019 Ranger midsize pickup, which it just unveiled and will produce near Detroit.

Meanwhile, GM executives confirmed that crew cab models of its next-gen pickups will be produced at a plant in Fort Wayne, Ind., beginning this fall. Those models, which represent more than 60 percent of sales, were almost entirely produced in Mexico.

GM North America President Alan Batey said the change in production was driven by the need for more capacity, not NAFTA, but the production shift reduces the risk those trucks would be hit with a 25 percent tariff if NAFTA unravels.

FCA is following in Ford's tracks. CEO Sergio Marchionne a year ago said the company could shift heavy-truck output from Mexico to Michigan, depending on the outcome of tax reform legislation and proposed changes to NAFTA. As part of the shift, FCA plans to invest more than $1 billion to modernize its Warren Truck Assembly Plant in Michigan.

Trump hailed the announcement in a Twitter message as "more great news as a result of historical Tax Cuts and Reform."

FCA US, like other U.S. businesses, is paying employees bonuses that it's attributing to savings from the $1.5 trillion tax cut law Trump signed last month.

"If his surrogates can find a way to stitch those stories together, they can find a way to back off the boiler on NAFTA and say we're getting the action we want" on reshoring manufacturing, Volpe said.

News reports continue to suggest that the White House is serious about breaking up NAFTA if its aggressive proposals to rebalance trade aren't taken seriously by Canada and Mexico. But Volpe told Automotive News that the outlines of a compromise on NAFTA 2.0 are shaping up.

He suggested the U.S. side could back away from its aggressive demands if Canada and Mexico come to the table with creative alternatives that address the core concern of the U.S. trade deficit with Mexico.

NAFTA currently requires finished vehicles to contain 62.5 percent content from partner nations for duty-free imports across the continent. U.S. negotiators proposed an 85 percent regional content value, with 50 percent guaranteed to American companies.

Canada and Mexico categorically reject the idea of a U.S. carve-out, but there are ways to boost the U.S. contribution to finished vehicles by changing accounting methods to capture more content produced in the region, he said.

The solution, he added, ultimately lies in counting inputs where the U.S. has a comparative advantage, such as the products and services of research centers in Silicon Valley and Michigan.

"So what I think you'll see is, instead of debating a number, they'll talk about a methodology of tracing that captures more of the valuable components of today, such as for powertrains, and the evolving technology road map of tomorrow, which isn't present in the agreement," Volpe said.

"If we can quantify some of these things, then we can track them," he said. "And if we can track them, I think the Americans will say that the U.S. is disproportionately strong in those areas."