Cars, Cows and a Half-Sunset: Here's How Nafta 2.0 Could Look
(Bloomberg) -- A stopgap Nafta deal could be around the corner. What might it look like?
Though the U.S., Canada and Mexico have made progress recently, including on the critical issue of autos, the majority of North American Free Trade Agreement chapters are unfinished and key disputes remain unresolved. That means a preliminary accord may still need to be changed to satisfy the next U.S. Congress or Mexican Senate and president.
While it’s not clear what a deal “in principle” as envisioned by President Donald Trump’s negotiating team actually means, pressure is ramping up. “The U.S. is wanting to move faster and to really draw to a resolution,” said Robert Holleyman, a partner at Crowell & Moring who served as deputy U.S. Trade Representative under Barack Obama. “At a political level, are there the outlines of what could be a successful conclusion for all three parties that then leaves it to the career negotiators and the attorneys to figure out how to flesh out?”
Based on interviews with stakeholders, officials and observers, here’s how the new Nafta is shaping up.
Nafta talks were never more fraught than in October when the U.S. proposed auto sector overhauls that would require 85 percent of a typical vehicle’s content to be North American-made, up from the current 62.5 percent, with fully 50 percent U.S.-specific content. Canada and Mexico said that was unworkable.
Then Canada and the U.S. decided to look at calculating the value of a car in a way that supports domestic jobs by awarding credit for elements such as higher wages and research-and-development costs. Dropping its 50 percent-content demand, the U.S. is said to have instead proposed a tiered system where not every car part would need to hit the 85 percent threshold. Canada and Mexico aren’t particularly opposed to something higher than 62.5 percent, but want it done in a way that’s not so complex it simply drives production offshore.
The new Nafta will probably also include raising Mexican wages or labor standards. That said, major gaps remain. “This auto deal is much farther apart than people are letting on,” said Dan Ujczo, an Ohio-based trade lawyer at Dickinson Wright. “How you basically keep the status quo but give the president a win is you count research and development, because a lot of companies are innovating, and you count labor.”
The U.S. also wanted a clause that would kill Nafta after five years unless all three countries agree to extend it -- a move business leaders say would add too much uncertainty. Why build a factory if the rules could quickly change?
All signs now point to some kind of periodic review. Nafta, after all, already has an exit clause: Any country can quit on six-months’ notice.
“They basically already agreed that the U.S. was going to back down on a strict hard deadline,” said Welles Orr, an assistant U.S. Trade Representative under George H. W. Bush now a senior adviser at law firm Miller & Chevalier. “They’d do a review and a mechanism and a study and everybody can call a win on that one, too.”
Procurement remains a major sticking point. The U.S., which dwarfs the population and economies of its neighbors, wants to cap the combined value of government contracts available to Canada and Mexico at the value of contracts awarded to U.S. firms in those countries. Canada and Mexico say that would leave them with less access than nations with fewer U.S. ties.
Some think the U.S. will back down, while others think Canada and Mexico will dig in on other issues and give up here. “They probably get to an agreement some way on procurement that satisfies the Canadians,” Orr said.
Ujczo doesn’t expect the U.S. to move on procurement. Regardless, while procurement access may drop he’s sure it won’t rise. “There’s certainly going to be no additional procurement granted in the Nafta,” he said.
Three sections of Nafta deal with resolving disputes. Chapter 11 is investor-state dispute settlement; Chapter 19 deals with anti-dumping and countervailing duty cases; and Chapter 20, the least controversial, deals with disputes over Nafta’s interpretation.
The U.S. wants to kill Chapter 19 -- though it’s one of the most important parts of Nafta for Canada -- and wants to make Chapter 11 optional.
Canada and Mexico have proposed having their own side-deal on Chapter 11, meaning their companies could have rights that U.S. firms don’t. “And the entire business community wants it,” Ujczo said of the investor-state mechanism.
It may come down to a trade off: keeping some anti-dumping measures in exchange for watering down Chapter 11.
Farming is another file with big divisions, little movement and some form of status quo as the most likely outcome. The U.S. proposed dismantling Canada’s system of quotas and tariffs for dairy and poultry, known as supply management -- a political non-starter in that country. It also proposed a measure that would effectively lower the bar for U.S. farmers to hit Mexican fruit growers with anti-dumping cases, and expose them to costly legal fights.
This issue has laid mostly dormant, and Nafta’s ramp-up comes as U.S. farm groups -- who generally support the deal-- cry foul over Trump’s mounting spat with China. Observers expect no major change to Mexican import rules. “The seasonal fruit thing has gone away, and has gone away for a while,” Orr said.
As for Canadian dairy, the country has given up slivers of its market in previous trade talks and could conceivably do so here.
Time is running out for this U.S. Congress to pass a deal. “You want to be starting just about at the beginning of a two-year Congress,” said Phil Levy, former senior trade economist in George W. Bush’s Council of Economic Advisers, now a senior fellow at the Chicago Council on Global Affairs. “There has not always been a great deal of realism in this administration’s approach to how you do trade agreements.” He said the prospect of a comprehensive deal being reached soon is “exceedingly unlikely.”
Mexican elections are approaching, with U.S. midterms following soon after. Levy said he could envision Trump giving notice of withdrawal from the current Nafta and “basically holding Congress hostage to pass the deal we just put in front of you.” Otherwise, this could stretch into late 2018 or 2019, even with something “in principle.”
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