Because the Trump administration aims to renegotiate an historic trade deal, the North American Free Trade Agreement, on an accelerated timeframe, it should come as no surprise that there is substantial uncertainty surrounding the outcome.
What each party to the negotiation wants, however, has come into focus.
First, the challenging timeframe is a real risk. NAFTA negotiations began in 1990. The agreement was signed in December of 1992, and the U.S. Congress ratified it in November of 1993. That timeframe won’t work for the renegotiation, which we have been calling NAFTA 2.0.
However, all countries seem to share a general desire to continue high levels of duty-free trade, and to modernize the agreement given all the changes that have taken place in business and in technology during the past 30 years. NAFTA 2.0 is best thought of as an opportunity that has substantial risk.
The United States wants to balance trade with Mexico
The White House in July released (.pdf) a list of objectives for NAFTA 2.0. One primary objective is a lower trade deficit with Mexico, which it believes would create domestic jobs and lead to the fulfillment of a major campaign promise.
Interestingly, other objectives closely resemble ones in the Trans-Pacific Partnership, the 12-country trade pact that included the U.S., Mexico, and Canada from which the Trump administration withdrew earlier this year. The TPP-like provisions include measures to regulate the treatment of labor, the environment, and state-owned enterprises.
The White House also wants new rules that govern the trade of services and digital goods, and to have created a mechanism to deter currency manipulation. There seems to be common ground in these important areas.
That seems to be where the consensus ends.
Importantly, the Trump administration wants rule-of-origin criteria to prioritize components sourced in the U.S. specifically in order to meet campaign promises to boost domestic manufacturing employment. A preference for U.S.-sourced materials, rather than materials sourced anywhere in the trade region, would be a dramatic departure from the original NAFTA.
Mexico’s trade representatives say that, if the Trump administration insists on country-specific rules of origin, it would walk away from the negotiations. This seems to be the most challenging point of negotiation right now. Reuters newswire this week reported: “Mexican and Canadian officials have already expressed concern that the United States has not yet presented details on some of the toughest issues, such as rules of origin which outlines how much of a product needs to originate in a NAFTA country.”
NAFTA’s Chapter 19 is another contentious issue. The Trump administration wants to be able to selectively impose duties on imports it thinks are unfairly subsidized by the originating country or set at artificially low prices, and Chapter 19 created a special settlement process that made this more difficult to do under NAFTA. Changing or eliminating Chapter 19 would allow the U.S. to selectively tax imports from Mexico or Canada in a way that it currently cannot.
Canada wants to liberalize non-tariff-related trade policy
Canada put out a 10-point list of objectives in August, which includes a call for new chapters on labor standards, environmental standards, labor rights, and indigenous rights, as well as policy to allow professionals to move across the borders with greater freedom.
It also wants to maintain Chapter 19. Canada’s commitment to NAFTA’s anti-dumping and countervailing dispute settlement process is a part of the agreement’s history: Canada briefly walked out of negotiations in 1987 when Chapter 19 was in danger of being left out of the original NAFTA.
Finally, Canada wants to eliminate the “Buy American” rules for construction projects at the state and local levels. This, too, is expected to be a major point of contention because the White House wants even more measures that protect its domestic construction companies from foreign competition.
Mexico wants to maintain the status quo and close NAFTA 2.0 in a timely manner
“Our objective is to have an expedited negotiation that maintains the benefits that we have achieved during the lifespan of NAFTA, but which at the same time serves as a platform for the modernization of the treaty,” states an official document on NAFTA 2.0 objectives circulated in the Mexican senate in July, per Reuters newswire.
Mexico’s political landscape is the primary driver of the accelerated NAFTA 2.0 deadline. Its president, Enrique Peña Nieto, cannot run for re-election because of term limits, and administration officials there have repeatedly warned that they would not be able to cull support for NAFTA 2.0 once campaigns begin in the spring. The White House has subsequently avoided setting a date for closing a deal. U.S. officials say that all counterparties aim to come to an agreement by the end of the year, but they caution that this is an aspiration, not a firm deadline.
According to the Peterson Institute for International Economics, it takes 18 months on average to negotiate a trade deal involving the United States and more than three and a half years to get to the implementation stage. The Institute looked only at bilateral deals — while NAFTA 2.0 is not a bilateral deal, it is reasonable to assume that it would be easier to close than, say, the Trans-Pacific Partnership, the multilateral deal that took around eight years to negotiate.
The sense of urgency for getting all counterparties to “yes” seems to be real. The details around how this plays out are of utmost importance to the automotive sector and mean a lot to other industries as well.