	Introduction

Under the North American Free Trade Agreement (NAFTA), which took effect in January 1994, motor vehicle and vehicle parts manufacturers have integrated their production operations in the United States, Canada, and Mexico. On July 17, 2017, the Administration announced its objectives in forthcoming negotiations. While U.S. domestic production of finished vehicles has fluctuated somewhat, Mexico has become a major center of parts and motor vehicle manufacturing, fully integrated into the U.S. and Canadian supply chains. Parts trade has grown more rapidly than trade in assembled vehicles. These include Mexico's lower labor costs, the Mexican government's investment in its educational system to graduate engineers and technicians to operate and manage vehicle and parts plants, and Mexico's growing network of free trade agreements with many countries outside the NAFTA region. Motor Vehicle and Parts Trade

Motor vehicle and parts trade accounted for more than 20% of U.S. merchandise trade with other NAFTA signatories in 2016, slightly more than the shares in 2006 and 2007 before the recession ( Figure 7 ). The United States has trade deficits in assembled vehicles with both Canada and Mexico ( Figure 9 ). Only in U.S. motor vehicle parts trade with Canada did the United States record a surplus ($7 billion) in 2016. In NAFTA, the rules of origin affecting motor vehicles and parts are established by a method intended to ensure that a certain percentage of the value of a manufactured product (as determined by the cost of inputs, labor, and other direct costs of processing operations) originates in the NAFTA region. NAFTA has the highest RVC requirement for automotive products, at 62.5% (meaning that the majority of the parts in the vehicle have to originate in the NAFTA region to receive the tariff benefit). NAFTA Renegotiation Process

A renegotiation of NAFTA is likely to be considered by Congress under Trade Promotion Authority. On May 18, 2017, the Trump Administration sent a 90-day notification to Congress of its intent to begin talks with Mexico and Canada to renegotiate or modernize the free trade agreement as required by TPA. ACTPN did not make specific recommendations with regard to motor vehicle trade, but its report does address some of the specific issues raised by motor vehicle industry and union organizations. However, its broad objectives are consistent with a number of recommendations cited by speakers at USTR's late June 2017 hearings, including
maintaining existing duty-free market access for industrial goods and removing nontariff barriers; promoting greater regulatory compatibility and cooperation and removing technical barriers to trade; updating customs procedures; strengthening the rules of origin to "ensure that the benefits of NAFTA go to products genuinely made in the United States and North America" and ensuring that such rules "incentivize the sourcing of goods and materials from the United States and North America"; preventing the establishment of restrictions on cross-border data flows; improving intellectual property protection; bringing labor and environmental provisions into the main NAFTA agreement, instead of in side agreements, while expanding their scope; and developing a mechanism "to ensure that the NAFTA countries avoid manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage."
Motor vehicles and vehicle parts accounted for more than 20% of the total value of U.S. merchandise trade with Canada and Mexico in 2016, making them the largest category of manufactured products traded among the United States, Mexico, and Canada. Since the North American Free Trade Agreement (NAFTA) took effect in January 1994, the vehicle supply chain has become fully integrated, with parts manufacturing and assembly in all three countries.
On May 18, 2017, the Trump Administration notified Congress of its intent to renegotiate NAFTA. In consequence, the 115th Congress will likely address numerous issues related to NAFTA and the North American motor vehicle industry.
NAFTA has contributed to a large increase in trade in vehicles and auto parts within North America. Since 1994, Mexico has grown to become a major location for vehicle and parts manufacturing, while production in the United States and Canada has remained fairly steady, except during recessions. In addition to NAFTA trade liberalization commitments, growth of the Mexican vehicle industry was assisted by unilateral Mexican measures that removed restrictive trade and investment barriers, as well as Mexico's lower labor costs, the government's investment in training engineers and technicians to operate and manage motor vehicle plants, and numerous free trade agreements that give Mexican vehicles and parts tariff-free access to countries where U.S. exports face a tariff. In 2016, the United States had a motor vehicle trade deficit with both NAFTA partners, a deficit in vehicle parts trade with Mexico, and a surplus in vehicle parts trade with Canada.
A topic in the renegotiation of NAFTA may be rules of origin, which determine which products qualify for the benefits of the agreement. NAFTA requires that 62.5% of a vehicle's net cost and 60% of the cost of parts originate in the NAFTA region in order for those products to have duty-free access to the United States. This is the highest such requirement for motor vehicles of any U.S. trade agreement. In general, vehicle and parts manufacturers support retaining the current rules of origin, whereas the United Auto Workers union seeks to require a higher percentage of regional content, which it believes would reduce the share of parts produced in non-NAFTA countries.
The Trump Administration announced its negotiating objectives for NAFTA renegotiation on July 17, 2017, but it has not enumerated negotiating objectives specific to the automotive industry. However, some of its stated goals are consistent with recommendations of auto industry and union representatives, including updating customs procedures, promoting greater regulatory compatibility within the NAFTA region, improving intellectual property protection, improving labor and environmental provisions, and deterring currency manipulation.