(In Part I, we explained that while Canada and Mexico seek to “modernize” NAFTA, the U.S. has said it seeks to “restructure” NAFTA.)
Even as NAFTA negotiators concluded the 7th round of negotiations (March 5th in Mexico), the threat to “Kill NAFTA” resonates. Negotiators agreed on the rules for regulatory practices and sanitary physo-sanitary (SPS) – key to the agriculture sectors. However, US proposals to “restructure” NAFTA have left little room for compromise on other key issues.
How does US seek to “Restructure” NAFTA?
The U.S. has proposed a significant change to the rules of origin that determine when a car can be said to have originated in a NAFTA country. These rules must be met for the automobile to enter duty-free into the U.S., Canada, or Mexico as a NAFTA product. Automobiles unable to claim NAFTA or other preferences (under other trade agreements) can attract a duty rate as high as 25%. Not surprisingly, 40% of U.S. light vehicles exported in 2015 were shipped to NAFTA partners and 50% of U.S. light vehicles were imported into the U.S. from NAFTA partners.
The existing rule is that 62.5% of an automobile must originate from within NAFTA to claim duty-free access. This rule also results in a large volume of automotive parts being shipped across the three countries. (In 2015, 75% of the value of U.S. auto parts were exported to NAFTA partners and 51% of the value of U.S. auto parts were imported from NAFTA partners.)
The U.S. has proposed that –
- 85% of the car must originate from within NAFTA to get duty-free entry; and
- 50% must be U.S. content.
These proposals have blindsided the NAFTA partners and the auto industry. Canada and Mexico are indicating that they are working on their counterproposals. Nevertheless, no breakthrough is expected on this issue at the Mexico meeting.
Investor-State Dispute Settlement
The NAFTA investor-state dispute settlement (ISDS) rules allow foreign investors to sue governments regarding provisions the investor considers deprives him or her of the benefits of the investment. By-passing the courts, ISDS provisions use arbitration panels whose decisions are binding on the parties, including the government. This is one of the most controversial aspects of NAFTA. Corporations (represented by US Chamber of Commerce and National Association of Manufacturers) love ISDS – they appreciate the protections they receive against expropriation. Just about everyone else hates it. Small and local businesses decry the ability of foreign corporations to bypass the court system on which they need to rely. Consumer, environmental and labor groups oppose ISDS provisions which can be used to overturn laws that require minimum use of local labor or local content or those aimed at protecting the environment. There is a broader concern about ISDS usurping right of a sovereign nation to make those laws it considers to be in its national interest.
The U.S. Government has consistently expressed its displeasure at being required to abide by the decisions of international panel decisions it finds not to its liking. In August 2017, the Trump Administration floated the idea of allowing NAFTA countries to opt out of NAFTA ISDS provisions. There was speculation that the purpose was to allow its investors to be able to sue Canada and Mexico but not be sued in turn. Canada and Mexico have responded that the U.S. can choose this path but would be alone in doing so. Such an outcome would mean that US investors would no longer have the ability to use the NAFTA arbitration proceedings to protect their interests. On this issue, as well, the Trump Administration finds itself on the opposite side of the table from the US corporations that are the strongest proponents of NAFTA.
Two other U.S. proposals have received less attention but are no more favored by Canada and Mexico. One proposal would require that the parties vote on disbanding or continuing the agreement every five years. This proposal is a non-starter because it would create such uncertainty that the agreement might as well be dead! A second proposal would eliminate Chapter 19 devoted to anti-dumping/countervailing duty disputes, which have been widely used by Canada and the United States.
To be fair, the U.S. finds some of Canada and Mexico proposals to be also unorthodox.
How do Canada & Mexico Seek to “Modernize” NAFTA?
Canada’s Minister of Foreign Trade, Chrystya Freedland says Canada’s goal is to make a good agreement, even better. Canada has prioritized providing improved access to the benefits of NAFTA so that they don’t just accrue to the top 1%. This means incorporating issues around the rights of indigenous people and gender equality. Outrageously, from the U.S. perspective, Canada has proposed an entire chapter devoted to trade and gender. Mexico has indicated its support for the proposal.
The above proposals are aimed at building popular support for what has been an unpopular trade deal. By including underrepresented groups, such as women, labor, and indigenous groups, build a broader coalition to both support and hopefully benefit from NAFTA.
Other less controversial proposals of Canada focus on strengthening labor and environmental standards and expanding government procurement rules to address “Buy American” laws. Mexico also seeks to incorporate traditional provisions aimed at increasing integrated production, improving competitiveness of the NAFTA value chain, and updating energy, digital and telecommunications provisions.
Can the Parties Find a Compromise?
The Trump Administration also seeks to strengthen labor. Agreement can probably also be reached on giving digital products a free pass on customs duties, the status quo under the WTO. And everyone wants to minimize red tape and increase transparency around border procedures.
The rhetoric and actions from the Trump Administration, however, continue to undermine the path towards compromise on the more controversial issues. The latest U.S. volley is the threat to impose tariffs of 25% on steel and 10% on aluminum. The US NAFTA partners would qualify for an exemption only if they agreed to US proposals, read a March 5 (2018) Trump tweet. As noted in Part I to this post, the underlying premise of “large trade deficits with Mexico and Canada” is not supported by the facts.
This threat goes beyond the normal negotiating bluster. Trade agreements, particularly among equal partners like Canada and the U.S., are negotiated from a “win-win” position. All parties come prepared to compromise by taking some wins and some losses.
This is why Canada and Mexico have begun to express their concerns about the NAFTA renegotiations and to talk of a “Plan B”. This too, could be a negotiating stance. However, timing is also an important factor in the NAFTA renegotiations.
Mexico will shortly begin to focus on its general elections, scheduled for July 2018. By then, the U.S. will turn its attention to the mid-term elections of November 2018. There is almost no hope of meeting the initial deadline of March 31 to successfully conclude the NAFTA renegotiations. The Trump Administration may just decide to pull the plug in March. Alternatively, should the parties choose to extend the negotiations into 2019, Mexico could have a new President who has vowed to “put Trump in his place” and pursue a more independent foreign policy. And the outcome of the US mid-terms will show the extent to which Americans support Trump’s protectionist and nationalist policies.
There is real cause for concern about the future of NAFTA.
(Read Part I on NAFTA negotiations.)