How a Trump Idea on Cars and Nafta Could Backfire: QuickTake Q&A

President Donald Trump wants to shrink the U.S.’s half-trillion-dollar trade deficit in goods and services in part by rewriting the North American Free Trade Agreement’s "rules of origin." Those rules dictate how much of a product must be made in the three Nafta countries -- Canada, Mexico and the U.S. -- to qualify for the treaty’s free-trade benefits. Trump is asking Canada and Mexico to tighten considerably the regulations for autos. He hopes this will bring car manufacturing jobs back to the U.S., though such a step also could backfire.

Generally speaking, a car is subject to Nafta’s preferential trade terms if at least 62.5 percent of it comes from the U.S., Canada or Mexico. (The threshold is generally 60 percent for individual parts not yet attached to a vehicle.) Automakers must specifically prove where some parts come from; that amounts to red tape, they say. And yet there’s something of a loophole: Not all parts and components are on the so-called tracing list, which determines which products’ origins must be tracked. Anything not on the list isn’t tracked, so it’s effectively treated as domestic content, even if was made abroad.