Nafta Talks Resume as U.S. Warns `Short Fuse' May Burn Down

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(Bloomberg) -- Nafta talks are picking up on Wednesday mostly where they left off a month ago, with tension and animosity in the air.

On Wednesday, Cabinet-level officials responsible for Nafta from all three nations said they’ll skip attending the talks for the first time and leave discussions to their negotiating teams. It’s the latest sign that reaching a deal isn’t imminent.

On Saturday, Mexican Foreign Minister Luis Videgaray made a thinly veiled threat to scale back efforts to police its border with the U.S. if it didn’t like where renegotiations were heading. Then on Tuesday, U.S. Commerce Secretary Wilbur Ross warned that the Trump administration was losing patience with the proceedings, and Canada used Nafta -- specifically, a section the U.S. wants to eliminate -- to file a legal challenge of U.S. softwood lumber duties.

At last month’s round, the parties extended talks through March, abandoning a December deadline, after the U.S. introduced its toughest proposals that were essentially rejected by Canada and Mexico. The challenge remains to seal a deal before politics overwhelm the trade agenda next year when Mexico holds presidential elections and the U.S. has congressional midterms.

The fifth round of talks are beginning with technical discussions from Wednesday in Mexico City and will formally kick off with the chief negotiators on Friday through Nov. 21. 

The Cabinet-level officials from the three nations in charge of Nafta won’t attend round five after they held “substantial” discussions at a Asia-Pacific Economic Cooperation gathering in Vietnam last week, according to a joint statement Wednesday. The three will be in “constant communications” with negotiators, who they’ve instructed to focus on making progress on proposals that have already been put forward, the statement said.

Mexico’s peso dropped 0.8 percent to 19.3199 per dollar as of Wednesday afternoon in New York, leading losses among the world’s 16 major currencies. The Canadian currency fell 0.3 percent to 1.2775 per greenback, trimming this year’s advance.

Smaller Elements

The session is expected to yield deals on smaller elements to modernize the 1994 accord, while negotiators aren’t expected to delve too deeply into the high-profile U.S. demands. Negotiators are working under the pressure of President Donald Trump’s repeated threats to pull out of the North American Free Trade Agreement.

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Secretary Ross said on Tuesday it “would be an enormously complex thing” to get a deal by the end of scheduled talks in March, though he expects “some sort” of agreement for Trump to consider. “Nafta is on a very short time fuse,” he said.

Bombshell U.S. demands punctuated the fourth round of talks in Washington, sending the three ministers on their way after a closing statement that saw them exchange their strongest barbs yet.

With U.S. lawmakers focused on tax reform, expectations are that the key battleground issues will more or less be punted into 2018.

Contentious Demands

The most contentious U.S. demands are on dairy, automotive content, dispute panels, government procurement and a five-year sunset clause, but there are 28 negotiating areas in total. The tough proposals have been essentially rejected by Canada and Mexico, as all parties wait for the other to blink first. Ross stood his ground this week, saying “the idea of a five-year sunset has been part of the president’s thinking since the campaign.”

Mexican Economy Minister Ildefonso Guajardo said Tuesday that his team will ask the U.S. for more details on its proposal to increase the content requirement for cars that qualify for Nafta benefits to 85 percent from the region and to establish a 50 percent minimum for U.S. content. “One thing is to say it, another thing is to analyze the capacity of the industry to achieve it,” Guajardo said.

Guajardo said negotiations for some chapters are very advanced, such as telecommunications and regulatory practices, and that several topics could be closed in this next round. Negotiators have already firmed up chapters covering competition rules and small- and medium-sized enterprises. Ross said he expects to eventually find agreement for new provisions on intellectual property rights.

BMO Capital Markets Senior Economist Sal Guatieri wrote in a note Wednesday that the countries look likely to focus on less-contentious issues, such as duties charged for online purchases, before discussing so-called “poison pill” proposals from the U.S. “The audience is restless, with calls from American businesses demanding the U.S. government negotiate a deal growing louder,” Guatieri said. “We’ll see if the chorus is loud enough to catch the ears of U.S. trade representatives.”

While adding extra rounds of talks has eased the time pressure on negotiators trying to overhaul the accord, any party can quit the pact with six-months’ notice.

©2017 Bloomberg L.P.

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