ILMA Compoundings April 2018 - 37

ILMA SEEKS EXCLUSION FOR GROUP III BASE OILS IN NAFTA
By Mindy Long

enegotiating the North American Free Trade Agreement (NAFTA) has been a priority for the Trump
administration, with the president looking to revamp
and rebalance the trade pact with Canada and Mexico.
The Trade Policy Agenda and 2017 Annual Report, issued
by the Office of the U.S. Trade Representative, noted that
the three countries agree that NAFTA is outdated, and
the administration believes it is time to bring the agreement up to date.
ILMA agrees and has several concerns with NAFTA,
particularly surrounding Group III base oils. When
NAFTA was ratified in 1994, low volumes of Group III
base oils were used, but much has changed in the oils and
lubricants industry in nearly a quarter-century.
Since NAFTA took effect, engine, transmission and
drivetrain technologies for motor vehicles have dramatically changed, largely to meet governmental mileage
standards. To meet stricter regulatory mandates, automakers are specifying lower-viscosity, higher-quality
lubricants, including engine oils and transmission fluids.
As a result, ILMA members have shifted to higher-grade
base oils, including Group III base stocks.
The challenge is that the overwhelming majority of
Group III base oils are not produced in the U.S., even
with last December's announcement that Motiva will
begin manufacturing Group III base oils in the U.S. With
the startup of Group III commercial sales, Motiva will be
the largest domestic producer of Group III base oils in
the U.S., enabling customers to benefit from NAFTA tax

advantages and shorter supply cycle times. However, the
U.S. production will likely remain a relatively small part
of the overall Group III base oil supplies.
Prior to Motiva's announcement, it was estimated that
99 percent of the Group III base oils used in the U.S. are
produced outside of North America, yet North American
demand is estimated at 16-17 percent of worldwide
production. As a result, the majority of Group III base
oils are being imported from Korea and the Middle East.
Base oil is a critical element, but it is the combination
of detergents, dispersants, friction modifiers, viscosity
index improvers and other chemicals that enables ILMA
members to have effective products. Because Group III
base stocks cannot be used by themselves in an engine oil
or transmission fluid, ILMA members must introduce
additives, chemicals and detergents to meet the increasingly demanding automakers' specifications.
Current NAFTA rules of origin do not distinguish
between Group III base stocks and finished products, such
as engine oils, in the tariff classification 2710.19. Because
there is no tariff shift, ILMA members cannot confer U.S.
origin on their finished products using non-NAFTAsourced Group III base oils. What's more, because they
are dependent on Group III base oils from non-NAFTA
sources, ILMA members' finished products using Group
III stocks are subject to an import duty when sold into
either Canada or Mexico. This puts ILMA members at a
disadvantage versus Mexican manufacturers in Mexico and
Canadian manufacturers in Canada because of the duty
imposed on greater volumes of finished products.
ILMA has reached out and has written to Ambassador
Robert Lighthizer, the U.S. trade representative, asking
that as part of the administration's renegotiation of
NAFTA, the origin rules be modified to eliminate the
tariff shift requirement for Group III base oils by including a 100 percent exemption for non-originating Group
III base stocks.
A tariff carve-out for Group III base oils could be
accomplished via a specific tariff item rule that allows
the use of foreign Group III base oils in any amount.
Another option would be to make an exception that
allows up to 90 percent of foreign Group III base oil
when direct-blending products, or the use of greater than
or equal to 35 percent regional value content for product,
which allows for the use of manufacturing and research
and development expenses in the calculation.

ILMA Compoundings April 2018

Table of Contents for the Digital Edition of ILMA Compoundings April 2018