As Donald Trump pushes to overhaul U.S. trade ties abroad, negotiations with his two biggest export markets are resuming in hopes of finding new common ground on easier subjects -- leaving the most contentious U.S. demands for later.
The fifth round of North American Free Trade Agreement talks starts Wednesday in Mexico City, two days earlier than initially scheduled. It’s the first meeting since U.S., Mexican and Canadian negotiators extended talks to March and added more time between sessions, abandoning Trump’s previous deadline.
U.S. Trade Representative Robert Lighthizer capped the last session by chastising Mexico and Canada for balking at certain demands -- it was the U.S. that sought the extension, according to two government officials familiar with the proceedings who spoke on condition of anonymity. The most contentious U.S. demands are on dairy, automotive content, dispute panels, government procurement and a sunset clause.
Mexico is warning talks could impact immigration cooperation with the U.S., while Canada is effectively holding up the Trans Pacific partnership -- a deal Trump quit, that was also effectively a NAFTA update -- as it pushes for improvements. Lighthizer has complained that Mexico and Canada aren’t agreeing to what was already in TPP.
One government official said NAFTA negotiations this week are expected to focus on smaller issues related to modernizing the deal, and the thorniest discussions will be put off until later rounds. Many observers expect the same.
“Instructions are ‘let’s keep the ball moving, let’s not have fireworks,’” said Welles Orr, a former assistant U.S. Trade Representative under George H. W. Bush who is now a senior international trade adviser in law firm Miller & Chevalier’s international trade practice in Washington. U.S. lawmakers are fully focused on tax reform and that’s left little bandwidth to push quickly for a NAFTA deal, Orr said.
He expects a handful of deals “on noncontroversial items to at least keep the pace of negotiations going and so that they can at least claim they’re making progress.”
‘Litmus Test’
NAFTA covers more than $1 trillion a year in trade and government officials have described essentially two sets of negotiations -- one focused on modernizing a 23-year-old agreement for an Internet era, and another where Mexico and Canada essentially rejected high-profile U.S. demands on subjects that bear Trump’s finger prints, like dairy and autos.
The negotiations, which started in August, cover 28 areas of trade. The countries have so far reached substantially or fully completed deals on chapters covering competition rules and small- and medium-sized enterprises. Chief negotiators are expected to arrive Friday and the ministers -- Lighthizer, Chrystia Freeland and Ildefonso Guajardo -- will join next week. A spokeswoman for Lighthizer declined to discuss the upcoming round.
Canada and Mexico are the first- and second-largest buyers of U.S. goods, but the U.S. still has a $53.1 billion merchandise trade deficit with Mexico through September of this year, and a shortfall of $12.4 billion with Canada. Trump has regularly criticized trade deficits and wants to reduce them; Canada and Mexico have said they’re not the best way to measure the success of a trade agreement.
“NAFTA has become kind of a litmus test of U.S trade intentions” for other U.S. trading partners in Asia and Europe, said Colin Robertson, senior adviser at the Dentons LLP law firm and a former Canadian diplomat. The U.S. demands signal they’re seeking “a substantial redo” of a pact, and those kinds of negotiations typically take years, he said.
Remove Exports
The willingness to fight in public was obvious at the last round. Lighthizer said he was “surprised and disappointed by the resistance to change,” while Guajardo said Mexico has limits to what it can accept. Canada’s Freeland criticized a “winner-take-all mindset.” While Canada and Mexico may be able to compromise, the real question is whether the U.S. can too.
“What they’re asking of the Canadians and Mexicans is to take away their exports,” said Chad Bown, senior fellow at the Peterson Institute for International Economics. “It’s really back to the Trump administration to decide for itself how serious they are about those proposals. If they are serious about them, I don’t see a serious outcome.”
Mexican Foreign Minister Luis Videgaray warned over the weekend that Mexico will be less likely to cooperate with the U.S. on security and immigration if NAFTA talks collapse. “It’s a fact of life and there is a political reality that a bad outcome on NAFTA will have some impact on that,” he said in an interview Saturday at the Asia-Pacific Economic Cooperation summit in Vietnam. “We don’t want that to happen and we’re working hard to get to a good outcome.”
When asked on Nov. 2 about a deal, National Economic Council Director Gary Cohn offered conciliatory words. “We’re trying,” he said in Washington. “Negotiators are continuously meeting, and we’re continuously trying to get to a point where we think that American- based companies and American-based manufacturers are treated fairly in the agreement.”
Trump may have wiggle room after U.S. automakers urged him to keep NAFTA, a pact he has said has led to one-sided trade and cost jobs.
NAFTA Impact
Linda Hasenfratz, chief executive officer of auto parts maker Linamar Corp., said in an earnings call last week she sees four key areas of dispute -- auto rules, the sunset clause, the dispute panels and government procurement. “There’s an opportunity to come to resolution on each of these issues if all parties want that to happen,” Hasenfratz, who sits on Canada’s NAFTA advisory council, said on a Nov. 7 earnings call.
An American proposal for 50% U.S. content in vehicles has “no chance” of being agreed to, she said, but the overall content requirement could be raised from the current threshold, which requires 62.5% of a vehicle be sourced from the three NAFTA countries.
If that happens, “there’s a chance we could win some new work,” Hasenfratz said. If NAFTA dies, she said it’s likely they’d revert to World Trade Organization tariffs of between 2 and 2.5%. “The bottom line is, one way or another, we would deal with the 2%,” she said. “No one is going to spend billions of dollars shifting work to different countries for 2%.”
Reverting to WTO tariffs would cut Canadian GDP growth by a total of about 1% over five to 10 years, Royal Bank of Canada said in a report Friday. “The odds that NAFTA will be torn up, not simply amended, appear to be increasing,” Senior Economist Nathan Janzen wrote. “The end of NAFTA would be a negative outcome for the Canadian economy, but a manageable one.”
