NAFTA Negotiations: Choppy Water?

After four rounds of negotiations, the parties to the North American Free Trade Agreement (NAFTA) acknowledged on October 18 that they will not be able to meet their year-end target for completion, and are extending the negotiations into the first quarter of 2018. They also recognized in a trilateral statement that “[n]ew proposals have created challenges” and a “significant conceptual gap among the Parties”. Several proposals tabled by the United States have been particularly opposed by Canada and Mexico, as well as U.S. business. They have contributed to the growing fear that President Trump will fulfill his repeated threats to withdraw the U.S. from NAFTA. This post looks at the state of the negotiations and several of the controversial U.S. proposals, which some have labeled “poison pills”.

In the four rounds held since the negotiations began in mid-August, the NAFTA parties have made some progress, completing work on two chapters (competition and small- and medium-sized enterprises), tabling substantially all of their initial proposals and consolidating text in several chapters. However, considerable work remains and has been complicated by several controversial U.S. proposals.

The U.S. proposals include a “sunset clause”, which would terminate the Agreement after five years unless all the parties agreed to continue it. That has been criticized as failing to give business any certainty as to the rules of trade, and could lead to virtually endless negotiations.

The U.S. also proposed a new automotive rule of origin, which would increase the NAFTA regional value content requirement from 62.5% to 85% and require that 50% of the content of autos and trucks come from the U.S. That would disrupt existing supply chains and is hotly contested by the auto industry.

Another controversial proposal would restrict Canadian and Mexican access to U.S. government procurement, capping it at the level of the combined procurement that the two NAFTA partners open to the U.S. Resorting to a dollar-for-dollar match would drastically alter the approach that the U.S. has used successfully to open procurement markets in more than 60 countries. The Canadian Foreign Affairs Minister Chrystia Freeland criticized the proposal as providing less access for Canada and Mexico than the U.S. gives to Bahrain under an FTA.

Other U.S. proposals would weaken the dispute settlement provisions in NAFTA. The most controversial would water-down the investor-state dispute settlement (ISDS) mechanism that has been incorporated in numerous U.S. trade and investment agreements, including by allowing a party to opt-in or out of it, making it essentially a voluntary system. The inclusion of an enforceable ISDS mechanism is a major aim of the U.S. business community. Another dispute settlement proposal would allow a NAFTA partner to reject a panel decision in a state-to-state dispute. The U.S. also wants to eliminate the Chapter 19 dispute settlement process for trade remedy cases (anti-dumping and countervailing duty), which was key to Canada’s signing on to the original NAFTA.

In a statement at the close of the October negotiations, the U.S. Trade Representative Robert Lighthizer reiterated the U.S.’s two objectives for the talks. One is to update the Agreement, including with regard to intellectual property, digital trade, anticorruption, technical standards and financial services. Citing the President, he pointed to the second objective of reducing the U.S. $500 billion trade deficit with its NAFTA partners. The U.S. objectives for the NAFTA negotiation included, for the first time in any trade agreement, improving the U.S. trade balance and reducing the trade deficit with the NAFTA countries.

The NAFTA partners have recognized that completing the negotiations by the end of 2017 is not attainable, so they have agreed to schedule more negotiating rounds through the first quarter of 2018. Mexico has indicated that the negotiations must conclude by that time because of its presidential election in July 2018.

The parties have also slowed the pace of the negotiations by setting the next round for November 17-21. Hopefully, that will provide an opportunity for parties to reconsider their proposals and positions and determine what is realistic to achieve, with the overall aim of ensuring that the negotiations “do no harm”.

Jean Heilman Grier

October 19, 2017

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