Snapshot on NAFTA renegotiations as the first round of talks begins


On Wednesday 16 August, the first round of talks to renegotiate the accord started in Washington D.C. The US, Mexico and Canada stated the challenges that the three countries are facing and presented different evaluations of NAFTA.

The first round ended on Sunday. The three countries agreed on an accelerated and ambitious renegotiation process and scheduled the second round of renegotiation for the first week of September in Mexico City.

This report includes our analysis of the initiation of the negotiations, a comprehensive background of NAFTA and seeks to answer the questions: Why and how did we get here? Who are the main stakeholders to watch? What are the principle objectives of each country? Which are the main risks?

THE UPSHOT

NAFTA Plus or Bust

“NAFTA has fundamentally failed many, many Americans,” Robert Lighthizer, US Trade Representative

Lighthizer's remarks on August 16th during the opening ceremony of the NAFTA renegotiation were less-than-comforting for those who hope to see the agreement enhanced.

He stressed two US priorities that could ultimately prove unacceptable for Mexico: (1) the need to ensure that the US’s “huge trade deficits” with Mexico do not continue; and (2) strengthening NAFTA rules of origin and US content. While tighter NAFTA rules of origin in the auto sector may be palatable, any effort to explicitly increase US content would be a non-starter for Mexico and Canada. Further, pro competitive measures could increase trade and help boost US exports to Mexico - a reasonable goal - but any attempt to restrict imports from Mexico (e.g., quotas, tariffs) would be unacceptable.

The opportunity exists to enhance and modernize NAFTA, but the mercantilism philosophy of the Trump administration does nothing to improve the chances of a mutually beneficial result. The US private sector must lobby hard over the coming months to ensure that the economic benefits derived from NAFTA – of which there are many – are protected and enhanced.

Trump wheel

BRIEF BACKGROUND

The North American Free Trade Agreement (NAFTA) is an international treaty signed by Canada, Mexico and the United States, that came into effect on January 1,1994. It phased out tariffs between the three countries over a 15-year period and created the largest free trade area in the world; generating economic growth by strengthening the rules and procedures governing trade and investment in the region.

On May 18, 2017, U.S. Trade Representative Robert Lighthizer informed the US Congress that President Donald Trump intended to commence renegotiation's with Canada and Mexico with respect to NAFTA. This, after Mr. Trump’s pre- and post-election statements on international trade; where he called for a potential withdrawal from the treaty, pledged to impose tariffs on Mexican products and criticised U.S. manufactures for their Mexican investments and operations.

NAFTA AT 25
  • In 2015, NAFTA partners represented 28% of the world’s GDP, with less than 7% of the world’s population.
  • During the same year, total trilateral merchandise trade amounted to over USD $1.0 trillion – more than a threefold increase since 1993.
  • Canadian, Mexican and U.S. companies have invested heavily in their neighboring countries to establish critical international supply chains; with the U.S. investing almost $500 billion in Canada and Mexico.  In turn, the U.S. has benefited from over $350 billion in investment from its NAFTA trading partners.
  • More than one in 10 U.S. private sector jobs (± 14 million) depend on trade with Canada and Mexico.
WHAT DO THE COUNTRIES HOPE TO ACCOMPLISH?

In line with President Trump´s concern with trade deficit, the US may pressure to somehow remedy the current trade imbalance with Mexico specifically. U.S. objectives also include renegotiating intellectual property rights, stricter labor laws, enhanced environmental laws and tougher rules on the origin of products. They will also be calling for new rules to govern the trade of services, like telecommunications and financial advice, as well as digital goods like music and e-books, which were not included in the original 1994 agreement.

Mexico will seek to retain unimpeded access for goods and services in the NAFTA region, promote greater integration of North American labour markets and establish rules of origin to guarantee NAFTA's regional benefits. Furthermore, Mexico wants to bolster the dispute resolution mechanisms of NAFTA, something that will likely be controversial given the US's desire to do away with Chapter 19, which established regional dispute resolution mechanisms.

Canada's goals include opening up access to government procurement rights, more labor mobility for professionals, defending Canadian rights to supply management and reform of the investor-state dispute settlement process. Canada will also look for new “progressive” elements in NAFTA 2.0 including, stronger labour standards, tougher environmental protection provisions as well as chapters on gender and Indigenous rights.  Canada considers maintaining Chapter 19 a priority.

RISKS AND OPPORTUNITIES
      • Canadian agricultural exports have long been a point of concern for the United States, particularly the dairy market. This issue will certainly take a central role in NAFTA renegotiation, and Mr. Trump’s administration has already taken the first step by imposing a tariff up to 24% on softwood lumber imports.
      • Last year, the United States registered a trade deficit with Mexico of over $63 billion. Reducing this imbalance has been a primary concern for Mr. Trump. But jeopardizing the international supply chains that have developed with large intra-regional investments would come at a steep cost for each of the nations involved.
      • An area of mutual benefit is in the energy market cooperation. Mexico has signaled an interest in deepening the relationship with its neighbors and importing more energy resources from the US could have the political benefit of reducing the US trade deficit.  The further opening of Mexican markets to international energy supply (refined gasolines and natural gas, mainly) could also come with the additional benefit of infrastructure investment for Mexico.
      • Political timing puts a strain on the renegotiation. Mexico will hold presidential elections next year and the US will face mid-term elections. The Mexican government wants to make sure that the renegotiation does not contaminate domestic politics and would like to see the process end before the beginning of the campaign season in March 2018. Business and political elites agree that a victory by populist Andrés Manuel López Obrador (Morena)  next year would further complicate NAFTA discussions, given his protectionist views. Domestic US politics also playd an important role. President Trump needs an urgent win after quickly losing popular support and failing to deliver campaign promises on issues such as healthcare and tax reform.
Trump door

NEGOTIATION COORDINATORS

Robert Lighthizer, United States

Before working in government, Lighthizer worked for the Washington, D.C. law firm of Covington & Burling. From 1978 to 1981, he was chief minority counsel for the United States Senate Committee on Finance. In 1983, during the administration of President Ronald Reagan, he became deputy trade representative. Lighthizer is a partner with the law firm of Skadden, Arps, Slate, Meagher & Flom, where he works to gain access to foreign markets on behalf of U.S. corporations.

Ildelfonso Guajardo, Mexico

Ildefonso Guajardo is the Minister of Economy of Mexico. He also served as Deputy of the LVIII and LIX Legislatures of the Mexican Congress representing Nuevo León. He was the Chief Economist of the Section for Brazil. He directed the Office for Free Trade Agreement Affairs, at the Embassy Of Mexico in Washington. He was the Deputy Coordinator of Economic Policy in the Peña Nieto Transition Team.

Chrystia Freeland, Canada

Chrystia Freeland was appointed Canada's   Minister of Foreign Affairs in January 2017. Previously she worked as a journalist working in a variety of editorial positions at the Financial Times, The Globe and Mail and Thomson Reuters, before announcing her intention to run for the Liberal Party nomination  to be a the Member of Parliament representing Toronto Centre.

CHIEF NEGOTIATORS

John Melle, United States

John M. Melle is Assistant U.S. Trade Representative for the Western Hemisphere. Appointed in March 2011, he is responsible for developing, coordinating and implementing the United States’ trade policy for the region.  Since joining USTR in 1988, Mr. Melle has held a number of positions covering Mexico and Canada.

Keneth Smith Ramos, Mexico

Kenneth Smith Ramos is the Head of the Trade and NAFTA Office of the Ministry of the Economy of Mexico, in Washington DC.  Previously, Ken Smith worked at the Mexican Federal Competition Commission, as well as in the Ministry of Economy. He started his professional career working for Mexico’s NAFTA negotiating team.

Steve Verheul, Canada

Mr. Steve Verheul was in charge of negotiating the Free Trade Agreement between the European Union and Canada. From 1989 to 2009 he worked as manager of agricultural trade policy in Canada, where he participated in the NAFTA negotiations and the creation of the WTO. He studied Arts at the Western University of Ontario and holds a Master's in Political Science.

Speyside has consultants on-the-ground in Mexico City and Washington D.C. and partners in Ottawa and Toronto. We are currently supporting clients with domestic and foreign policy insights and intelligence around the future of NAFTA, including granular sector by sector and company risk analysis. To discuss how we can support with information, strategic counsel or advocacy support please contact amy.glover@speyside-group.com or gonzalo.escribano@speyside-group.com