Plausible scenarios for the conclusion of NAFTA negotiations range from a tweaked agreement to be hashed out before the July 1 Mexican presidential election to a comprehensively changed pact that will wrap up late this year or in early 2019, according to sources familiar with ongoing talks.
While hopes were high entering this week for a “deal in principle” to be reached before U.S., Mexican and Canadian officials attend the Summit of the Americas in Peru April 13-14, the chances of that happening now appear to be waning after Mexican Economy Minister Ildefonso Guajardo said on Mexican TV Monday that he didn’t expect a deal to be struck this week.
Guajardo said he believes there’s an 80 percent likelihood that such a deal will be concluded by the first week in May.
U.S., Mexican and Canadian negotiators are expected to continue discussions in Washington this week and next week, according to an Office of the U.S. Trade Representative (USTR) official.
Some of the most divisive issues of the talks still must be worked out, including U.S. proposals to make NAFTA’s investor-state dispute settlement (ISDS) mechanism optional for NAFTA parties; remove binational antidumping/countervailing duty dispute settlement; ease the threshold for petitioning for AD/CV duties on seasonal/perishable imports; and for Canada to open its market to more U.S. dairy exports.
“I still think [NAFTA negotiators are] far apart on a lot of those issues, but even if we close the gap, we’re going to run out of time” to close a deal in principle before the Peru summit, said an attorney familiar with negotiations.
Florida Sens. Marco Rubio, R, and Bill Nelson, D, wrote a letter April 6 to Senate Finance Committee Chairman Orrin Hatch, R-Utah, and ranking member Ron Wyden, D-Ore., urging their "firm commitment" to support the inclusion of USTR's proposed mechanism to allow U.S. fruit and vegetable growers to use seasonal data to seek regional relief in AD and CV duty cases.
Florida is a leading year-round producer of food crops that most areas in the U.S. can yield only in warmer months and therefore competes with produce imports from Mexico during winter months more heavily than other states.
Canada also is privately telling people that there won’t be such a deal by the end of this month, the source said.
Chances are better that the three parties will agree to a deal in principle by the end of May and essentially pause talks—at least those including Mexico—until after the July 1 presidential election, the attorney said.
Concluding a preliminary deal within that time frame would better position talks to conclude entirely by the end of the lame duck session of U.S. Congress, as not having such an initial framework in place by then would increase possibilities that NAFTA becomes a U.S. congressional election issue, which could engender frustration among more moderate lawmakers from both parties, the source said.
Claiming a preliminary victory also could give the Trump administration enough “political cover” for Congress to agree to extend Trade Promotion Authority (TPA) before its July 1 expiration.
President Donald Trump in March requested an extension of TPA, which accords the executive branch broad authority to negotiate trade agreements, through July 1, 2021.
Even with a GOP majority in both houses of Congress, TPA extension isn’t definite as trade issues including the administration’s NAFTA ISDS proposal and recently ordered steel, aluminum and China tariffs have spurred irritation among various free-trade Republicans.
But with all the benefits a deal in principle could bring, NAFTA observers are cautioning that such a deal is largely symbolic and not necessarily indicative that major gaps between the parties are being closed.
“A deal in principle is very different from a deal,” said a second source, a cleared adviser for NAFTA negotiations.
That source mentioned that the United States, as recently as a few weeks ago, proposed that minimum wages factor into how NAFTA’s automotive rules of origin are calculated and that updates to four sectoral annexes and 24 of 30 chapters of NAFTA are still on the table. Negotiators have agreed upon the complete text of six chapters in the agreement so far.
The Trump administration is conscious of the possibility that leftist populist candidate Andres Lopez-Obrador wins the Mexican presidency, the cleared adviser said. According to Bloomberg’s Poll Tracker, Lopez is 13.5 percentage points ahead of his nearest rival for the presidency.
The candidate has excoriated Trump’s hard-line immigration stance and voiced a largely nationalist view toward NAFTA, but noted that he agrees with the Trump administration that Mexico should raise its wages and that the trade agreement should seek that goal.
USTR’s most recent automotive rule of origin proposal would require 80 percent of major auto components like transmissions to be built with labor compensated at either $15 an hour or the average North American minimum wage, while simpler components like wire harnesses probably wouldn’t have to meet such wage standards, the attorney source said.
The United States in August tabled a proposal to require automobiles to be made with 85 percent North American content and 50 percent U.S. content to enjoy NAFTA tariff benefits, but since then has been open to other concepts.
But U.S. labor interests hold the view that labor requirements in the context of automotive rules of origin should be in addition to the broader labor obligations under NAFTA, a U.S. labor source said in a recent interview.
U.S. labor representatives have called for NAFTA labor obligations to be binding and enforceable, as well as for the elimination of ISDS and strong currency provisions.
There’s concern that the prospective deal in principle indicates that NAFTA parties may be rushing through negotiations and that labor-related issues could get the short-shrift, the labor source said.
That source mentioned that Canada and the EU concluded an agreement in principle on their trans-Atlantic Comprehensive Economic and Trade Agreement (CETA) years before the deal provisionally entered into force.
Former Canadian Prime Minister Stephen Harper and former European Commission President Jose Manuel Barroso signed the CETA agreement in principle on Oct. 18, 2013, but the pact has been provisionally applied only since Sept. 21, as it still awaits final legal review to enable formal application.
“The idea of signing [a NAFTA] agreement in principle leads you to ask what are those principles and how binding is this agreement?” the labor source said.
One possibility is that the Trump administration could look to avoid the formal TPA process, which subjects trade agreements to a congressional vote, through a simpler revamp of NAFTA, akin to what the U.S. and South Korea settled on for their bilateral free trade agreement (KORUS).
USTR described those talks, which concluded last month, as a “refurbishment” of the six-year-old deal, which was not subject to the stricter congressional vetting requirements of the NAFTA renegotiation, largely because the amendments were tweaks and not part of any full-scale re-examination.
As it stands now, the updated KORUS remains a deal in principle as Trump has voiced his intention to use the preliminary status of the updates as a means to ensure solid alignment between the United States and South Korea heading into a tripartite meeting set for the near future aiming to secure North Korean denuclearization commitments.
KORUS updates included an agreement to double the amount of cars per U.S. manufacturer that South Korea allows into its market that can meet U.S. safety standards in lieu of Korean safety standards; new customs South Korean customs verification procedures; and a commitment by Seoul to ensure its pricing program for innovative drugs doesn’t discriminate against U.S. pharmaceutical exports.
A KORUS-style option to concluding NAFTA talks is “feasible,” but it’s unclear whether the U.S. is decided on if it wants to go that route, the cleared adviser said.
“They could do the KORUS option and basically tell Congress, 'Suck it up,’” the source said.
While U.S. Trade Representative Robert Lighthizer has pushed for a concluding a full-scale NAFTA update by the end of May, there’s simply not enough time for that, and others have pressured him to “pocket what we have, agree on one or two issues where we need to make meaningful changes and call it a day,” the source said.
Congress might be OK with such a move, especially if tighter wage and labor standards are adopted, according to the cleared adviser.
Ironically, the adviser said, if the U.S. chose to go with the KORUS-style option for NAFTA, the pact’s current ISDS and binational AD/CV duty dispute settlement provisions would be poised to survive through any updated deal.
Canada recently proposed to essentially delete Chapter 11 ISDS in exchange for leaving in Chapter 19 binational AD/CV duty dispute settlement provisions, though U.S. officials had communicated near the start of the renegotiation an intent to push for removal of Chapter 19, the attorney source said, citing “multiple people” close to talks.
“Canada doesn’t really care about [Chapter] Eleven, and frankly, it fits their progressive agenda to not have an Eleven,” the source said. Mexico’s “business community isn’t real happy about it, but Mexico isn’t going to let a deal die on Eleven.”
According to the source’s understanding of talks, Canada said it would concede to U.S. demands on ISDS if it agreed to leave in Chapter 19—or at least relax its position a bit. Canada has remained a champion of Chapter 19 before and during NAFTA talks.
Because Chapter 19 is “synonymous with softwood lumber” and is a current vehicle for a Canadian dispute against U.S. duties on softwood, Lighthizer likely couldn’t outright agree to leave Chapter 19 fully in, as Pacific Northwest lawmakers would likely echo calls from the local lumber industry to eliminate the chapter, the source said.
A phaseout or sunset provision for Chapter 19 would be more likely than an immediate removal, the attorney said.
“I think we’re going to end up somewhere there,” the source said. If “it stays in its current form with no changes, I don’t think that can get through Congress.”