The NAFTA Morass

The NAFTA Morass

The North American Free Trade Agreement (NAFTA) renegotiation sought by President Trump is at risk – Canada, Mexico and the U.S. are still far apart on six key issues.

The North American Free Trade Agreement (NAFTA) was a landmark deal. It effectively synchronised the business cycles of Canada, the US and Mexico, boosting the revenues and the earnings (via enhanced productivity and lowering of tariffs) of corporates in all three countries. 

Aside from that, it has transformed the relationships between each members’ security, policing and foreign affairs departments, leading to very close cooperation on all these fronts.

All that is now at risk, as the Trump administration threatens to exit NAFTA. What’s more, there’s now the added pressure of a legislative window that is closing, as Mexico holds general elections on 1 July, and the US holds its mid-term elections in November. The likelihood of a successful renegotiation within this diminishing timeframe is very small. This is because of the distance that still separates the sides, on six significant issues:

  1. Auto sector rules of origin: This is a technically tough challenge, as the auto sector is the most integrated across the three countries. The average car part crosses borders dozens of times during the production process. An additional problem is that if the rules become too complex, companies will simply pay the tariff.
  2. Dispute resolution: The US wants to rescind companies’ existing ability to take legal action against governments if necessary – which is unacceptable to Mexico and Canada.
  3. Sunset clause: Effectively, the US is insisting on a five-year maximum duration for the new agreement, after which it needs to be renegotiated or it is automatically rescinded. Again, the other two stakeholders find this unacceptable.
  4. Intellectual property protection: This article was already agreed by the three countries in the TPP (Trans Pacific Partnership) agreement. But since the US has exited the TPP, this is now back on the table.
  5. Seasonality of fruit and vegetable exports: This is the US administration’s insistence that Mexico only export during the seasons when US farmers cannot meet demand.
  6. Energy sector: This was not open in Mexico when NAFTA was signed, but it now is, so it represents a new area of negotiation.

 

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