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Some experts say there is only a 50-50 chance of a successful NAFTA conclusion this year. (Photo: US Embassy, Mexico)
Wednesday, February 14, 2018

NAFTA Deal This Year?

Will negotiators find consensus on NAFTA this year?

Inter-American Dialogue

Negotiators from Canada, the United States and Mexico met in Montreal at the end of January to continue negotiations to revamp the North American Free Trade Agreement, or NAFTA. Though negotiators seemed cautiously optimistic about the progress made during the sixth round of talks, industry executives and others close to the negotiations said the three countries were unlikely to meet the March 31 deadline for a new agreement, and that talks could even extend until next year. And during the talks, negotiators from Mexico and Canada rejected a U.S. proposal to restructure a corporate arbitration system that is a key component of NAFTA. How are negotiations going? Will the three countries be able to resolve larger sticking points like the arbitration system? What will it take for all three sides to successfully reach a deal before Mexico’s presidential election in July?

Andrés Rozental, member of the Advisor board, president of Rozental & Asociados in Mexico City and senior policy advisor at Chatham House: Trade negotiations are long, drawn-out affairs, often taking several years to conclude. Thinking that the NAFTA renegotiation could be finalized in several months was always a pipe dream, and the current state of play confirms the difficulties in finding common ground on the proposals put forward by the Trump administration. Even if negotiators had been able to agree by now on the new and revised texts covering dispute settlement, rules of origin, export seasonality and a sunset clause, 2018 is an election year in both Mexico and the United States. Trade agreements are highly sensitive politically, and it was never going to be feasible to conclude negotiations and send the results for the respective legislative approvals. As presented, several U.S. proposals on the more difficult issues mentioned above are unacceptable to both Canada and Mexico, both of which are trying to be constructive and understanding of the reasons behind them. Even in the United States, a convincing private sector and political coalition is pressuring the White House to limit overall damage to NAFTA. This is especially true in the case of the agricultural and automotive sectors, both of which are against the changes proposed by the Trump administration. There is little chance of reaching a final agreement before the Mexican presidential election, or even before the November congressional midterms in the United States. For NAFTA to survive as a free-trade pact, with improvements and new agenda issues incorporated, the United States will have to abandon the idea of replacing it with a managed trade agreement whereby Mexico and Canada lose the existing benefits of tariff-free trade in goods and service at the expense of an absurd U.S. attempt to eliminate trade deficits through obstacles to the established, highly integrated, North American economy. 

Julissa Reynoso, partner, and Michael Fernández, associate, at Winston & Strawn: As the United States, Mexico and Canada continue their negotiations to revamp NAFTA, discussions about the Chapter 11 investor-state dispute settlement (ISDS) mechanism have come to a standstill. While Mexico and Canada are committed to maintaining some form of ISDS agreement between themselves, the United States is seeking the right to opt out. Trump administration officials have publicly criticized Chapter 11 as an invasion of sovereignty and as a measure that incentivizes companies to outsource to Mexico. Thus, there is a real possibility that a NAFTA revamp will end up with no ISDS provision. It appears that Mexico and Canada have largely taken a hard line against the United States’ reluctance to sign onto an ISDS mechanism. As a result, a deal will depend on how the U.S. position evolves in the coming months. U.S. domestic politics are likely to be a factor. NAFTA’s ISDS provision has attracted much criticism. Just recently, a number of high-profile U.S. senators argued for the elimination of NAFTA’s ISDS provisions altogether. Ultimately, for some version of ISDS to survive, negotiators will need to address the concern of ISDS’ critics that it lacks transparency and inappropriately impinges sovereignty. Absent agreement, U.S. businesses may very well face a future with limited investment treaty protections in Mexico and Canada. The short-term consequences of this are important from an investment perspective, as U.S. investors have growing concerns over the outcome of Mexico’s elections.

Pablo Heidrich, assistant professor at the Arthur Kroeger College of Public Affairs at Carleton University in Canada: Negotiations are not going well, at least from a Canadian perspective, as the U.S. proposals so far have been unacceptable. It is not only the demands made to restructure the corporate arbitration, but also the claims made regarding Canada having to dismantle its protectionism in dairy, poultry, retail, finance and media industries, plus the fact the United States has not offered anything in return for those concessions. Canada has requested changes in U.S. protectionism of its lumber and hi-tech industries, as well as federal rules to limit states’ legislation discriminating against international services or goods providers, but so far Canada has not received a positive response. It is unlikely that the three countries can resolve larger sticking points like the arbitration system, given that there are other issues on the table. The arbitration system is of a ‘larger’ significance only for the United States, not for its partners. U.S. sector-specific protectionism and states’ discriminatory laws and practices are indeed more relevant for Canada and Mexico. Without a resolution of at least part of latter, no change can be expected. In order for the three countries to reach a deal before the election, they will need either a change of strategy on the part of the United States, who would have to give up in at least some of issues relevant to its partners in exchange for advancing its agenda, or to find a face-saving compromise among all three countries where the status quo is not radically modified, but perhaps the spectrum of the agreement would be enlarged to cover trade issues not yet included. But neither of these are very unlikely outcomes in the short term. The United States indeed might be seeking to terminate NAFTA in time for the Trump presidency to deliver better results to the Republican Party in the 2018 midterm elections.

James R. Jones, member of the Advisor board, chairman of Monarch Global Strategies and former U.S. ambassador to Mexico: From my outsider’s vantage point, it seems that the climate for a successful negotiation improved after the last round of talks in Montreal. But I still give no better than 50-50 odds of a successful conclusion this year. It appears that in addition to the three completed NAFTA chapters, another dozen or more are 90 percent complete. As with many things in negotiation, whether it’s congressional reconciliation or labor-management issues, a sense of good will, trust and desire to conclude determine the outcome. When I was in Congress, these attributes existed among both Republicans and Democrats, and as a result, things were accomplished. That doesn’t exist today. Whether these traits truly exist among the trilateral negotiators remain to be seen. One possibility to be considered is bifurcating the process and approving the roughly half of NAFTA upon which there can be agreement within the next month. Then come back after the U.S. midterm elections and the Mexican national elections to resume negotiating the modernization of the rest of NAFTA. That would give the beneficiaries of NAFTA, such as the farm interests, the six million Americans whose jobs depend on NAFTA, the energy industry and others a focused chance to be heard, perhaps for the first time. That our negotiators are trying to rid the corporate arbitration protections is baffling to me. These provisions protect U.S. business from less developed and trusted legal systems. I believe there have been eight cases filed by U.S. businesses, and we have won them all. Why would our government disregard America’s businesses and so aggressively go against their interests? Elections do matter. They send messages to policymakers. That may be the best way to break the impasse on what remains to be negotiated.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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