These Are Five Sticking Points to a New Nafta Deal: QuickTake
(Bloomberg) -- The clock is running on Nafta negotiations. Though trade among the U.S., Canada and Mexico has tripled since the North American Free Trade Agreement took effect in 1994, U.S. President Donald Trump blames the accord for a loss of U.S. manufacturing jobs and for trade deficits. Talks to update Nafta effectively began last August with a pair of objectives -- modernizing an aging agreement for new economies and rewriting it to appease Trump. With time running out to get a deal in time for this U.S. Congress to pass it, these are the major sticking points.
1. The Tariff-Free Auto
For Trump, Nafta is mostly about cars. Mexico has emerged as an auto-making powerhouse within Nafta, sending on average $4.3 billion of parts and $2.6 billion of finished vehicles each month to the U.S. over the last five years. Under current Nafta rules, at least 62.5 percent of a car needs to be sourced from the three countries in order for it to be traded tariff-free. U.S. negotiators are said to want to raise that to 75 percent (down from their initial proposal of 85 percent), though the details aren’t yet clear. The U.S. also wants to expand the “tracing list” of car parts whose origin is actually tracked. Canada and Mexico have warned that the U.S. proposals are too much, too fast, and that companies would simply abandon using Nafta -- and pay U.S. tariffs, which are relatively low -- rather than contort their supply chains.
2. Mexico’s Fruit and Canada’s Milk
The U.S. seeks the phase-out of Canada’s protectionist system of quotas and tariffs for dairy and poultry, known as supply management, which is something of a sacred cow. Its demise is seen as a political non-starter for Canada. The U.S. also wants to lower the bar for mounting a trade challenge against Mexico for exports of fruits to the U.S. There’s been virtually no movement on either. It’s not clear if the U.S. backed down, as some analysts believe happened.
3. The Airing of Grievances
Two of Nafta’s provisions for settling fights are under fire. One sets up panels to review complaints that a country is flooding another’s market with an under-priced product, a practice known as dumping. The stakes over these so-called Chapter 19 panels (after the section of Nafta that created them) are high. Canadian Prime Minister Justin Trudeau says the panels are “essential.” The U.S. wants them gone. U.S. negotiators are also targeting investor-state dispute settlement panels, which deal with disagreements between a company and a government. The U.S. wants to make that system optional, hinting they’d drop out altogether. The U.S. business community opposes such a step. Canada and Mexico have said they’d strike a side deal if necessary to keep the panels.
4. The Sharing of Work
U.S. administrations have long advanced so-called Buy American policies to shield public-works projects from foreign bidders. Such policies can result in other countries retaliating by blocking U.S. corporations, such as General Electric Co., from winning foreign business. The U.S. wants to cap the combined value of contracts available to Canadian and Mexican bidders at whatever the value is of contracts those countries award to U.S. companies. Such a formula could benefit the U.S., since its economy and population dwarf those of its neighbors. The sides are in a standoff here.
5. The Five-Year Itch
The U.S. wants to add a clause specifying that Nafta expire in five years unless the three countries agree to extend it. Businesses warn that such a move would would kneecap long-term investment by adding too much uncertainty into the mix. Negotiators settle on some kind of non-binding periodic review. After all, Nafta already has an exit clause: any country can quit on six months’ notice.
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