As the White House prepares to renegotiate the North American Free Trade Agreement, I would like to throw out two sobering words: domestic content.
There's an expression you probably hoped you would never hear again.
The first time NAFTA was argued in the early 1990s, it became uncomfortably apparent that the auto industry had a wide spectrum of definitions for domestic content -- the key to determining what faces a tariff.
U.S. automakers had one idea. The UAW had a different one. The international brands had different ideas, and suppliers disagreed among themselves, depending on their situation.
I will predict that 25 years later there still isn't much agreement.
It is an accounting morass.
Auto parts cross the U.S.-Mexico border, sometimes more than once or twice, get added touches in one place and turned into modules at another. The subcomponents used in Illinois and Ohio might come from warehouses in Los Angeles that rely on imported materials from Thailand or China or Mexico.
You end up with estimates and percentages. NAFTA contains rules for how to roll up or roll down the percentages to be either domestic or not for accounting purposes.
Does the raw material determine whether the item is imported or domestic? Or does its value on leaving the warehouse matter more, after the importing company has added U.S. transportation costs to it, factored in warehouse handling expenses and accounted for the overhead expense of leasing the warehouse and paying local taxes to operate it? The logistics employees in Los Angeles? What about their health care expenses? Is that part of the component's "domestic content"? Some of those questions are silly to some but important to others.
If a Japanese company in Indiana pays an American worker $16 an hour to unpack cartons of electrical items that were assembled in Mexico by a worker who made $2 an hour -- is that an 8-1 ratio of local content?
And just to ponder one example, if Mazda North American Operations imports a Mazda3 from Salamanca, Mexico, wouldn't the manufacturer view its value based on what the product sells for to an American consumer? If so, that would include the U.S. "value added" that went into the car -- including the amount of money Mazda has to spend to transport the car and advertise it, the cost of having several thousand U.S. employees on payroll, and even the factory incentives shared with the retailer.
What about the investment required of the Mazda dealer? A piece of real estate and a building with furniture to showcase the car and computers and shop tools to service the customer. Isn't the cost of a staff of trained employees reflected in the end price of any good? Then there are the federal income taxes paid by everybody in the chain north of the Rio Grande.
When it took effect in 1994, NAFTA was a bundle of wrangled compromises and delicately parsed definitions. I predict that upon cracking open the old buried chest again in 2017, a lot of accountants are going to swoon from the vapors.