Tax & Accounting Blog

What to Realistically Expect From U.S. FTA Negotiations

Blog, Global Trade, ONESOURCE August 11, 2017

With the UK’s decision to leave the European Union and the unexpected U.S. Presidential win of Donald Trump, 2016 brought some uncertainties to the world of free trade agreements.

Since then, UK Prime Minister Theresa May triggered Article 50 of the Lisbon Treaty, officially starting the two-year process of negotiating terms for the UK’s departure from the EU (Brexit). Leaving the EU means leaving behind the trade blocks and a renegotiation of free trade agreements while figuring out their place within the World Trade Organization.

In the U.S., President Trump has set his sights on the North American Free Trade Agreement (NAFTA), formally initiating the renegotiation process on May 18, 2017.

With Brexit now in process, and President Trump renegotiating NAFTA, what can we realistically expect from trade negotiations? For answers, we look to research on prior U.S. Trade Agreements.

The Peterson Institute for International Economics (PIIE) did research on the negotiation period for 20 U.S. trade agreements in order to give us some insight on how trade negotiations really work. What PIIE found was that on average it takes one and a half years to negotiate a Free Trade Agreement with the United States, but it takes over three and a half years for the deals to reach the implementation stages. This time frame does not include staged duty rates during which FTAs typically gradually reduce duty rates after the first effective date of the FTA, a process that could take years before all FTA parties see zero duty rates across all of their goods.

PIIE notes that negotiation periods have become longer over time due to increasingly complex rules that take longer to ratify, especially when there is a lot of trade at stake. A good example of this is the Trans-Pacific Partnership Agreement (TPP), an agreement with 11 Pacific Rim member nations, making it the largest agreement in history. The TPP took five years of negotiations before the deal was finally signed on February 2016. The deal signing was not the end; it only began the two-year ratification process where the top GDP nations are required to domestically approve the final text in order for the deal to be implemented. With President Trump withdrawing the U.S. from the TPP, this will only cause additional uncertainties and delays for the remaining participants.

PIIE’s research also found that neither a trading partner’s size nor stage of development had significant impact with the delays in signing trade deals with the U.S. What they found was that there are two significant variables in explaining the correlation between the launch of a trade agreement and the signing. The two variables that help speed up trade deals, according to PIIE, are having a monarch and having an election year.

According to PIIE, having a monarch reduces the length of negotiations by approximately half, as monarchs seem to have more freedom when it comes to carrying out reforms.

Election years also seem to have an impact on negotiations. According to PIIE’s research, agreements that are signed in a U.S. presidential election year end up taking about 40 percent less time than agreements signed in other years. PIIE’s research found that more than half of U.S. trade agreements were signed during an election year.

PIIE contributes this to negotiating presidents wanting to close agreements they start which will then become part of their legacy.

This was not the case for former U.S. President Obama, who spent years negotiating the Trans-Pacific Partnership Agreement.  Butting up against the final arrangements for the TPP into an election year, President Obama was unable to put the agreement to a vote in congress. This resulted in President Trump’s withdrawal of the U.S. from the trade deal during his first week in office.

Interestingly, both variables provided by PIIE’s research currently apply to the UK and the U.S. The UK has a monarch, and the U.S. has a new president who is currently renegotiating NAFTA with Canada and Mexico.  Mexico is also facing an election year to elect a new president in 2018.

In fact, it has been rumored that the U.S., Canada, and Mexico have agreed to a series of seven rounds of negotiations, scheduled three weeks apart with a stated goal of concluding negotiations by the end of 2017. According to Reuters’ sources, negotiations will begin mid-August.

On July 17, the Office of the United States Representative released a Summary of Objectives for the NAFTA Renegotiations. PIIE noted at least five ambitious U.S. objectives that will generate strong resistance from Canada and Mexico. Those objectives include the demand for trade in goods to be “balanced,” and a call for tighter rules of origin.

According to PIIE, considering the aggressive objectives placed by the U.S., and that NAFTA is a three-country trade deal of $1.1 trillion annually, it is unlikely that an agreement will be reached in such a short period of time.  The U.S. has suggested a very aggressive timetable to conclude negotiations, with many observers concluding the tight timeframe could potentially lead to a bad agreement.

What we can realistically expect, based on PIIE’s research, is that NAFTA renegotiations will take closer to one and a half years to sign.

Learn More About ONESOURCE Global Trade for FTA

 Sources:

World Economic Forum

“With Brexit in mind, just how long do trade deals take to agree?”

https://www.weforum.org/agenda/2016/07/how-long-do-trade-deals-take-after-brexit/

Peterson Institute for International Economics

“How Long Does It Take To Conclude a Trade Agreement With The US?”

https://piie.com/blogs/trade-investment-policy-watch/how-long-does-it-take-conclude-trade-agreement-us

Peterson Institute for International Economics

“Scenarios for Concluding the NAFTA Talks”

https://piie.com/blogs/trade-investment-policy-watch/scenarios-concluding-nafta-talks

The New York Times

“What is TPP? Behind the Trade Deal that Died”

https://www.nytimes.com/interactive/2016/business/tpp-explained-what-is-trans-pacific-partnership.html

Reuters

Trans Pacific Partnership Trade Deal Signed, But Years of Negotiations Still To Come

http://www.reuters.com/article/us-trade-tpp-idUSKCN0VD08S

Reuters

“Exclusive- Three Sides Agree On Seven Rounds of NAFTA Talks- sources”

http://www.reuters.com/article/usa-trade-nafta-idUKL1N1KA0GU