What To Expect From NAFTA 2.0 Negotiations

By Greg Quinn and Eric Martin

Bloomberg

August 15, 2017

Sparks could fly when trade negotiators for U.S. President Donald Trump, Canadian Prime Minister Justin Trudeau and Mexican President Enrique Pena Nieto meet Aug. 16-20 in Washington. Their task: Begin renegotiating the North American Free Trade Agreement. At 23 years old, Nafta is long in the tooth but also responsible for tripling U.S. trade with Canada and Mexico to $1.2 trillion of goods and services last year, from about $350 billion in 1993. Each leader has a list of must-haves and wish-fors, some of which could be deal-breakers for the other two. The good news for free traders? Trump has largely stopped talking about ripping up Nafta and slapping tariffs on Mexico and Canada, while Vice President Mike Pence says Nafta 2.0 can produce a “win-win-win” combination. And while Trump has repudiated the Trans-Pacific Partnership, several of that deal’s features are on the U.S.’s Nafta agenda. Here are some of the major sticking points: 

1. The Big Prize for Trump

The U.S.’s small goods-and-services trade surplus with Mexico before Nafta turned into a deficit of $63 billion last year, which Trump says is evidence that Nafta has been a bad deal for the U.S. Seeking a big win after recent setbacks on health care and immigration, Trump wants the Nafta talks to deliver the prize he most desires, a lower trade deficit with Mexico. When it comes to Canada, Trump has said he can live with “tweaks,” probably because the U.S. had a $7.7 billion surplus with Canada last year and dozens of U.S. states count their northern neighbor as their biggest export market.

2. Settling Disputes

When Nafta was first negotiated, Canada pushed the U.S. to create special panels to settle disputes over duties and tariffs, fearing that U.S. courts would favor American companies. The stakes over what’s known as Chapter 19 panels (named for the section of Nafta that created them) are high, with the U.S. saying they should be discarded and Trudeau saying they’re “essential.” Canada has successfully used the panels to fight duties on exports of softwood lumber to the U.S. Mexico’s economy minister, Ildefonso Guajardo, says Chapter 19 doesn’t undercut U.S. sovereignty and that some dispute-settlement clause must remain.

3. Who Really Made That?

What makes a car or a can of paint a North American product? Nafta’s “rules of origin,” which lay out the percentages of components in a product that must be from one of the three nations to qualify for tariff exemptions. The U.S. wants higher percentages. Automakers are resisting, arguing that it would add red tape and increase costs, and ultimately leave integrated North American factories vulnerable to cheaper cars from Europe and Asia. Mexico says that, while it isn’t opposed to reviewing rules of origin in some industries, in other areas tightening them would be “shooting ourselves in the foot.” For the record, a car needs 62.5 percent of the vehicle’s value to qualify and a can of paint needs at least 50 percent.

4. Autos -- Another Trump Sore Point

Mexico has emerged as an auto-making powerhouse within Nafta, sending an average of $4.3 billion of parts and $2.6 billion of finished vehicles a month to the U.S. over the last five years. Most new auto factories in North America have gone to Mexico, a sore point for the U.S. and Canada. Trump has moved away from his earlier call for a tariff on Mexican auto products, and may now use other tactics, such as forcing Mexico to agree to higher wages and labor standards, to take back market share.

5. Buy American

U.S. governments have long advanced policies to shield public-works projects from foreign bidders, which can result in countries’ retaliating by blocking U.S. corporations, such as General Electric Co., from winning foreign business. Trump seeks a revival of “Buy American” clauses without offering Canada and Mexico similar concessions, a position that may be hard to maintain at the bargaining table. It could, however, be a chip the U.S. will give up in exchange for concessions elsewhere.

6. Welcome to the Digital Age

Nafta was written before most people owned cellphones. All parties agree the treaty should be upgraded to recognize digital services, but how to do that is contentious. Another tricky spot: Canadian retailers oppose raising limits on duty-free imports to $800 because they fear that would only shift more sales from Canadian retailers to U.S. websites like Amazon.com. Cargo companies are also eager for rules allowing goods to be tracked and approved by customs agents electronically instead of sitting at border crossings. On labor, technology companies want more access to Nafta’s work visas, like the “TN” version that would allow programmers to move between the three nations with ease. The U.S. has resisted this. Mexico has said that U.S. complaints about Mexico’s low wages could be addressed by allowing more workers to move between the two nations.

7. If Not Paris...

While Trump hits Mexico over unfair labor practices, the return criticism will be the U.S. president’s refusal to abide by the Paris climate-change agreement and his weakening of domestic environmental rules. The two issues are linked: Currently, Nafta has only “side deals” on labor and environment standards, which makes them difficult to enforce. This time, the U.S. wants them brought into the main text, as the trans-Pacific deal would have done. Trudeau especially wants efforts to reduce carbon emissions added to the deal. Since he’s staked his reputation at home as a green leader, Trudeau won’t wish to be seen as caving to Trump on the issue.

8. Currency Wild Card

The U.S. has asked for a chapter on currency manipulation. It may get more than it bargained for: One country’s sensible monetary policy can be another country’s idea of currency manipulation. During the global banking crisis, for example, the U.S. Federal Reserve’s loose monetary policy weakened the greenback and led to accusations of manipulation by other countries whose currencies strengthened and exports declined.

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What To Expect From NAFTA 2.0 Negotiations

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