Publish in Perspectives - Wednesday, October 25, 2017
The North American Free Trade Agreement faces an uncertain future after the United States hardened its negotiation stance. (Image by Library of Congress)
Will negotiators find a way to rework NAFTA?
BY LATIN AMERICA ADVISOR
The fourth round of negotiations for the North American Free Trade Agreement, or NAFTA, ended on Oct. 17 with U.S., Mexican and Canadian negotiators deciding to prolong the talks through next March, abandoning their goal of reaching an agreement by year-end. Will negotiators be able to strike a deal amenable to all three countries? Will Trump administration demands, blasted as “poison pill” proposals by the head of the U.S. Chamber of Commerce, doom the talks? How will next year’s U.S. midterm elections and Mexico’s presidential election affect the renegotiations? If NAFTA disappears, what would be the consequences for North America’s businesses and economies?
Arturo Sarukhan, board member of the Inter-American Dialogue and former Mexican ambassador to the United States: Given the depth and breadth of the U.S.-Mexico trading relationship, which went from $91 billion in 1993 to $579 billion in 2017, it’s hard to imagine a scenario in which a NAFTA-less future benefits any of the countries, notwithstanding the fact-free vacuum and mercantilist obsession—and most recently the gobbledygook in internal White House memos—with which the Trump administration has approached trade with its North American partners. The least worrying baseline case would be one in which the three countries revert to their pre-NAFTA levels of protection, with WTO commitments and most-favored nation tariffs. While most of those tariffs are today certainly lower than at the time NAFTA was signed, there’s no question that even this scenario would involve a dramatic and painful unwinding of integrated supply chains and production platforms. There’s no question either that termination would involve higher consumer prices, business failure and substantial job loss in all three nations. The more relevant question for the United States in the near future, however, might be ‘who lost Mexico?’ There’s already substantial public-opinion and political backlash to the stuffing the Trump administration is attempting to pull off with its two neighbors. This will severely constrain the Mexican government’s maneuverability to agree to poisonous or damaging clauses, particularly as the crunch-time of both the negotiations and the Mexican electoral campaign converge. Mr. Trump should be very careful what he wishes for. The United States has had the luxury of having an ally nation on its southern border for decades now. Torpedo NAFTA and its political and economic foundations, and it will have a huge and detrimental impact on all of the edifices of the strategic bilateral relationship that we have so painstakingly built since NAFTA and since 9/11.
Clifford Sosnow, partner at Fasken Martineau in Canada: All countries go into negotiations aware of the domestic political situation that will be affected by the talks. NAFTA is no different. If the U.S. positions are not flexible and there is absolutely no room to negotiate, then they raise the risk of NAFTA failure. Even though Canada and Mexico have rejected some of the United States’ proposals on procurement, dispute settlement, dairy access, automobile rules of origin and a sunset clause, among others, the United States has agreed to continue discussions until the first quarter of 2018. This means that the United States is introducing ‘wish list’ proposals and is prepared to see if or how the proposals can be modified to obtain agreement. The likelihood a substantial NAFTA negotiation being completed before the end of 2017 was highly unlikely, even though all three countries are aware of the U.S. midterm and Mexican presidential elections. Next year’s elections, at the very least, will add another layer of uncertainty to an already uncertain negotiation. Annual trade between the NAFTA countries is $1.2 trillion. Supply chains by some of the largest employers and smaller businesses have been built to take advantage of NAFTA. Since its inception, the NAFTA countries have become more integrated. It is true that if the United States left NAFTA, Canada and Mexico could still keep NAFTA between them, the older Canada free-trade agreement would apply between the United States and Canada, and WTO rules would apply to Mexico-U.S. trade. But the disruption in supply chains, the increased tariff and administrative costs and the confusion created by the U.S. withdrawal could seriously harm the economies of all three countries.
Larry B. Pascal, partner and chair of the Americas Practice Group at Haynes and Boone in Dallas: The culmination of the fourth round of the NAFTA renegotiation talks and the announcement of the extension of the talks to 2018 highlight several realities. The parties agree that modernizing the agreement is necessary, particularly in areas either not addressed or only lightly touched upon in the current version. Moreover, there appears to be progress in several technical areas. However, the Trump administration has adopted for strong negotiating positions in a variety of areas that jeopardize the success of the talks, particularly with respect to: 1) eliminating bilateral trade imbalances; 2) increasing requirements for regional and country-specific origin (particularly in the automotive sector); 3) expanding national preferences in government procurement; 4) weakening investor-state and trade remedy dispute resolution regimes; and 5) subjecting the agreement itself to mandatory periodic sunset review in the absence of new negotiations. These demands will be very hard for Canadian and Mexican trade negotiators to accept. Moreover, the upcoming 2018 midterm congressional elections in the United States and presidential and congressional elections in Mexico present additional challenges and may restrict the negotiating room for the trade representatives of these two countries. In particular, leading Mexican presidential candidate Andrés Manuel López Obrador has strongly criticized NAFTA and is expected to run on his own populist platform. If López Obrador is elected, a NAFTA renegotiation would be even less likely to be successfully concluded. A terminated NAFTA would negatively affect the three North American countries by slowing trade between the three countries, which are major trade partners.
Peter Hakim, member of the Advisor board and president emeritus of the Inter-American Dialogue: Until recently, it appeared that President Trump, despite his continued attacks on NAFTA, might be satisfied with few innocuous changes to the 25-year-old pact. A withdrawal from NAFTA seemed improbable, given the opposition of powerful lobbies—giant corporations, Wall Street banks, agricultural enterprises and others. Most Republicans support free trade, as do key members of Trump’s economic team. So far, Mexico and Canada are resisting the U.S. negotiators’ demands—highly restrictive rules of origin, preferences for U.S.-made goods, scrapping dispute resolution mechanisms and renegotiating the pact every five years—but they may have to accept some of them, or see the United States abandon the agreement. Calculating the costs of ending NAFTA is an impossible task, but the blow would be greatest for Mexico. The main costs, however, may not be economic. Trump’s attacks on NAFTA, coupled with his other venomous insults of Mexico and Mexicans, have already provoked a popular wave of anti-U.S. sentiment and growing mistrust between the governments, which could presage the election next year of a Mexican president hostile to the United States. Bilateral cooperation on many vital issues is threatened and could return relations to where they were 30 years ago, when Mexico’s priority was protecting itself and its economy from the United States. Governments everywhere are trying hard to find ways to accommodate the Trump administration. They recognize the power and wealth of the United States. But if Washington imposes its demands on Mexico or pulls out of NAFTA—as it has from several other international accords—it will be another sharp warning signal that United States has become an unreliable and unpredictable partner.