|May 21, 2018
By Allison Fedirka
It’s been nearly nine months since NAFTA talks began, and the agreement’s future is still uncertain. The United States had set May 17 as a deadline for reaching a deal, but as of today no deal has been announced. In the preceding weeks, all sides were involved in intense talks in Washington, and high-level officials had indicated since April that an agreement was near. But just this week, the Mexican economy minister said he did not believe a deal would be reached by the deadline.
This wouldn’t be the first time a deadline has come and gone without a deal. When talks began last September, U.S. and Mexican officials had hoped that an agreement could be made by the end of the year. But as 2017 ended, negotiators realized this wouldn’t happen and adjusted their expectations. Then, officials said talks should be wrapped up by March, before campaign season in Mexico went into full gear. But that didn’t happen either. U.S. Speaker of the House Paul Ryan then set the May 17 deadline for talks. As with the previous targets, it shouldn’t be considered a hard deadline – negotiations won’t end if a deal isn’t reached. It was merely a goal set for domestic political reasons.
As time runs out on President Donald Trump’s ability to fast-track approval of a revised agreement, pressure on the U.S. to reach a deal is mounting. NAFTA negotiations are being carried out under the Trade Promotion Authority, a measure that requires a simple majority in each house to pass an agreement. The agreement would have to be approved as is, without any amendments, and in exchange, the administration agrees to consult with a wide range of groups during negotiations. It’s a valuable tool because it gives Mexican and Canadian governments confidence that any agreement they reach won’t be changed after talks are concluded. If changes were introduced, they would need to be approved by the other two governments. But the TPA comes with certain deadlines. The administration must give Congress 90 days’ notice that it intends to sign a deal, and Congress then has 90 days to vote on it. Midterm elections, however, will be held in November, and if the Republicans lose control of Congress, the administration will have a harder time winning majority approval for the deal.
Talks between the three governments have been stalled for a variety of reasons. The first and perhaps most contentious is wage and production requirements for the auto industry. The U.S. and Mexico appear to be coming closer to an agreement on content rules – Mexico now wants 70 percent of auto components to be sourced within North America, while the U.S. is pushing for 75 percent. The U.S. has withdrawn its demand that vehicles coming into the U.S. contain 50 percent U.S. content and replaced it with demands that 40-45 percent of vehicle assembly occur in places where wages are $16 per hour or higher and that two-thirds of steel in cars come from North America. Mexico has flatly rejected the wage requirements, and Canada has said only that the current proposal could increase red tape and affect competitiveness.
The U.S. is also asking for a sunset clause, which would require all parties to agree to remain in the agreement every five years. Both Canada and Mexico oppose this condition. Ottawa has said that it is completely unnecessary because a mechanism for withdrawing from the agreement already exists and that the clause would create uncertainty, potentially impacting business. The final point of contention relates to a mechanism used to settle disputes among the three members. The U.S. wants to remove dispute settlement panels while Canada and Mexico want to keep them.
The three countries also have yet to fully address several issues that are critical to trade in North America, including agriculture, intellectual property and pharmaceuticals. Farmers in the U.S. and Canada are concerned over the lack of attention being given to agricultural issues. U.S. farmers in the southeast are pushing for the ability to more easily sue Mexican producers for flooding markets with their products. Right now, farmers can only file anti-dumping claims, which require claimants to provide proof of damages caused across the entire country. In addition, U.S. dairy farmers have said they want better access to the Canadian market while Canadian dairy farmers have made it clear that they want the Canadian dairy industry to remain protected from outside competition. The Trump administration is also looking at rules governing pharmaceuticals and intellectual property protection. Trump recently called on the U.S. trade representative to address price fixing for American pharmaceutical and medical devices abroad. The U.S. also added Canada to a priority watch list for intellectual property protection on April 27, even after Ottawa unveiled new measures to improve regulations on April 26.
None of these issues, however, will prevent a deal from being reached on their own. What negotiators really need to decide is whether they want a comprehensive deal with drastic changes or whether they want a deal now. Obviously, a deal that settles all the remaining issues and disagreements will take time, but if the parties are more concerned with meeting deadlines, compromises need to be made somewhere.
If negotiators want a deal soon, they will likely need to declare an agreement in principle. This would require the countries to announce that they agree on the basic terms of a deal, buying them more time to hash out technical details. Legal experts believe this would be enough to comply with TPA requirements. It would also give all three parties a political win but kick the can down the road for more complex issues like pharmaceuticals and intellectual property protection. Even if the May 17 deadline passes without an agreement, negotiations will likely continue but could be derailed when talks turn to more contentious issues that have yet to be discussed in detail. But even under prolonged talks, the current agreement will remain in place. All sides have a vested interest in keeping NAFTA intact – the domestic backlash against withdrawing would be costly. NAFTA is ultimately an economic agreement, but given the political climate in the U.S. and Mexico, the pace at which it is negotiated and the terms of a new deal will be largely political decisions.
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