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. President Donald Trump has criticized the agreement, and on May 18, 2017, the Trump Administration notified Congress of its intent to renegotiate the agreement, as required by the 2015 Trade Promotion Authority (TPA). The 115 th Congress may consider legislation for a "modernization" of NAFTA under TPA, a process by which Congress agrees to expeditiously consider implementing legislation for a trade agreement negotiated by the President, provided he meets certain statutory negotiating objectives and congressional notification and consultation requirements. On July 17, 2017, the Administration announced its objectives in forthcoming negotiations. This report discusses the development of U.S. motor vehicle production under NAFTA and analyzes the North American motor vehicle market, including production, plant locations, and continental trade patterns. It summarizes the motor vehicle rules of origin in NAFTA and compares them with similar requirements in other trade agreements, and examines how the potential changes in NAFTA might affect the motor vehicle and motor vehicle parts industries in the United States. U.S. motor vehicle manufacturing has changed significantly since NAFTA took effect. 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. The number of European, Japanese, and South Korean automakers with U.S. vehicle production has also grown during this time ( Figure 1 ). There were nearly 800,000 jobs in U.S. motor vehicle and parts manufacturing in 2016 ( Figure 2 ), with the largest share of employment in parts manufacturing (580,000 in 2016). Since 1996, both vehicle assembly and parts manufacturing employment have decreased by 27%. There are many reasons for changing employment levels, including economic conditions, trade patterns, and technological change. Domestic sales of motor vehicles have recovered from their major decline during the recent recession, and the bankruptcies and restructurings of GM and Chrysler. Sales in 2016 reached 17.5 million units, the highest annual figure on record. Imported vehicles—those manufactured outside of North America—have maintained a relatively constant share of total sales ( Figure 3 ). Integration of the U.S., Canadian, and Mexican automotive industries began decades before NAFTA. Nevertheless, tariffs and nontariff barriers added additional cost and complicated the flow of components and finished vehicles among the three countries. In some cases, this led manufacturers to produce similar engines, transmissions, or other products in each country, even when it might have been more efficient to manufacture them in a single location. A series of trade agreements and domestic policy changes in each country enabled much closer integration of North American motor vehicle manufacturing. The Canada-U.S. Auto Pact of 1965 was the first step in opening automotive markets in North America. Previously, the United States and Canada each imposed tariffs on imported assembled motor vehicles and parts. Although several manufacturers had assembly plants in both countries, if a manufacturer wished to produce an engine in one country and install it in a vehicle assembled in the other country, the engine would be subject to tariffs. The Auto Pact eliminated tariffs on vehicles and parts for "designated" manufacturers that agreed to maintain minimum production levels in Canada. The pact also required that vehicles and parts have at least 50% U.S. or Canadian content in order to benefit from the tariff exemption. No Japanese or European auto manufacturers produced vehicles in the United States or Canada at the time, and when they later opened plants, they did not benefit from tariff-free movement of parts and vehicles across the border. The effect of the Auto Pact was to create an integrated U.S. and Canadian market for motor vehicles and parts, while ensuring that a specified share of vehicle manufacturing remained in Canada. As a result of the Auto Pact, U.S. and Canadian motor vehicle industries were generally integrated by the 1980s. The agreement did not lead to major changes affecting automotive trade, although it adjusted the system of tariffs applied to imports from Europe, Japan, and other sources outside North America. The Auto Pact was incorporated into the Canada-U.S. Free Trade Agreement (CUFTA) that went into force in January 1989. Although Mexico was not a party to the 1965 Auto Pact or the 1989 Canada-U.S. Free Trade Agreement, the Mexican government took steps during the same time period to encourage the development and growth of manufacturing in Mexico. Mexico's export-oriented industries began in 1965 with the establishment of the maquiladora program, which allowed foreign-owned businesses to set up assembly plants in Mexico to produce for export, as part of the Border Industrialization Program created under President Gustavo Díaz Ordaz. The Border Industrialization Program was a response to the 1964 termination of the U.S. Bracero Program, which had allowed Mexican workers to cross into the United States for seasonal employment. Under the industrialization program, maquiladoras could import intermediate materials duty-free with the condition that a certain percentage of the final product be exported. Maquiladoras were originally restricted to the U.S.-Mexico border region and normally participated in production sharing with their U.S. facilities. Manufacturers in other regions of Mexico faced much more restrictive trade and investment barriers, which were eventually eliminated after NAFTA. Under Mexico's Border Investment Program, maquiladoras operated under the following special rules: lower trade and foreign investment restrictions than other sectors in Mexico; access to duty-free imports of intermediate materials with the condition that a percentage of the final production was exported; duty-free import of manufacturing equipment with the condition that it would be exported if the company ceased to operate under the program; and exemption from Mexican laws requiring majority Mexican ownership and from prohibitions on foreign ownership of real estate near borders and coastlines. Maquiladora operations increased rapidly during the 1970s and 1980s. As Mexican labor costs were very low compared with those in the United States, U.S.-based automotive manufacturers initially used maquiladoras to make labor-intensive products such as wire harnesses, assemblies of wires that carry electricity to lights, dashboard indicators, and other components. Over time, manufacturers began producing more sophisticated components, such as brakes and suspensions, in maquiladoras. Maquiladora production of auto parts was intended to supply auto assembly plants in the United States and Canada, and it was not integrated with domestic assembly of automobiles in Mexico. At the time, companies such as General Motors, Ford, Chrysler, and Volkswagen, which were assembling vehicles in Mexico, were subject to trade and investment restrictions under a series of Mexican auto decrees that also required a minimum proportion of Mexican content. (See box below on Mexico's Auto Decrees.) Automobiles produced in Mexico were generally not exported to the United States and Canada and in some cases did not meet U.S. or Canadian safety and emissions standards. Imports of new vehicles from the United States and Canada into Mexico were not allowed prior to 1989. After NAFTA took effect, Mexico merged the maquiladora operations and Mexican domestic assembly-for-export plants into one program called Maquiladora Manufacturing Industry and Export Services (IMMEX). NAFTA regulations continued to allow maquiladoras to import products duty-free into Mexico, regardless of the country of origin of the products. This phase also allowed maquiladora operations to increase sales to the Mexican domestic market. However, in 2001, rules of origin established in NAFTA replaced the previous special tariff provisions that applied only to maquiladora operations, so that any products that qualified as North American origin could be imported duty-free into Mexico for any purpose. At the same time, some inputs imported by maquiladoras from non-NAFTA countries became subject to Mexican tariffs, raising costs for maquiladoras that imported from countries such as Japan or China. The market-opening provisions of NAFTA gradually eliminated all tariffs and most nontariff barriers on goods produced and traded within North America over a period of 15 years starting in 1994. Most of the market-opening measures of NAFTA resulted in the removal of tariffs and quotas applied by Mexico on imports from the United States and Canada. Mexican tariffs were substantially higher than those of the United States at the time NAFTA was negotiated. Moreover, many Mexican products entered the United States duty-free under the U.S. Generalized System of Preferences. Prior to NAFTA, the United States assessed the following tariffs on imports from Mexico: 2.5% on automobiles, 25% on light-duty trucks, and a trade-weighted average of 3.1% for automotive parts. In comparison, Mexico's more restrictive tariffs on U.S. and Canadian automotive products were 20% on automobiles and light trucks and 10%-20% on auto parts. NAFTA helped lock in Mexico's automotive-industry reforms by phasing out the restrictive auto decrees. It also included the gradual removal of many nontariff barriers to trade, provided for uniform country-of-origin provisions, enhanced protection of intellectual property rights, required less restrictive procurement practices by the Mexican government, and eliminated performance requirements on investors from other NAFTA countries. Since NAFTA, North American motor vehicle manufacturing has become highly integrated, with major Asia- and Europe-based automakers constructing their own supply chains within the region. The major recent growth in the North American market occurred largely in Mexico, which now accounts for about 20% of total continental vehicle production ( Figure 4 ). In general, recent investments in U.S. and Canadian assembly plants have involved modernization or expansion of existing facilities, while Mexico has seen new assembly plants. In addition, many parts manufacturers have opened plants in Mexico to be close to the growing number of vehicle assembly plants.