As the Trans-Pacific Partnership negotiations enter their final stage, one issue remaining to be resolved concerns rules of origin for automobiles. Rules of origin determine how much of a product needs to be made within the free trade area in order for it to receive duty-free treatment. This is a tricky issue for automobiles because automakers rely heavily on global value chains where different parts are made in different countries.

Japan wants very liberal rules of origin because its industry’s supply chains include non-TPP countries like Thailand. Canada and Mexico want very strict rules of origin, because their industries benefit from preferential access to the U.S. market through the North American Free Trade Agreement. 

Canada and Mexico’s position in the TPP talks is protectionist. It’s also a consequence of negotiating trade liberalization through regional agreements. In the same way that industries who benefit from protectionism oppose the reduction of trade barriers, industries that benefit from preferential access through trade agreements oppose the reduction of other trade barriers.

Auto manufacturing investment in Canada and Mexico is driven in part by the fact that Canadian and Mexican content make it easier to import into the United States duty free under NAFTA. If the United States drops trade barriers with other countries, Canada and Mexico become relatively less attractive places to invest. Tight rules of origin in the TPP would reinforce Canada and Mexico’s advantage.

If negotiations at the World Trade Organization continue to flounder and regional agreements like the TPP proliferate, rules of origin will become a larger and larger problem for global trade.