May 2018

By Daniel P. Erikson and Gabriella Ippolito

When the North American Free Trade Agreement (NAFTA) came into force between the United States, Canada and Mexico on January 1, 1994, it created the world’s largest free trade area of 444 million people that now produces $17 trillion worth of goods and services. Canada is presently the United States’ second largest trading partner and Mexico is the third largest. U.S. trade with its NAFTA partners stands at $1.2 trillion and the two countries buy one-third of U.S. exports.

Today, the efforts to renegotiate NAFTA continue to churn forward more than five months after blowing through the initial deadline of December 2017. We first described NAFTA as “in the cross-hairs” last September, while in October we wrote that NAFTA was “still on the brink,” and in November we warned of “turbulence ahead.”  Even now, six months later, the question remains whether extending the talks into serious overtime will yield anything different than the unilateral withdrawal from NAFTA by U.S. President Donald Trump, or merely the fizzling of these efforts into the cauldron of Mexico’s 2018 presidential election politics. 

The first round of NAFTA negotiations was held in August 2017, and the negotiating teams from the United States, Canada, and Mexico completed the eighth round in late April. To date, seven chapters have been concluded on competition, small and medium-sized enterprises (SMEs), anti-corruption, regulatory practices, public administration, sanitary and phytosanitary measures (SPS), and telecommunications. The chapters on digital trade and energy are also close to completion, which would bring the total number of completed chapters to nine out of 30.

What’s happening now?

  • High-level meetings took place throughout the week of April 23 with the aim of completing the agreement by May 1, which was when temporary exemptions for U.S. steel and aluminum tariffs on imports from Canada and Mexico were due to expire. The agreement was not completed and talks are scheduled to resume on May 7. In the meantime the Trump administration has extended the exemptions on aluminum tariffs to June 1.
  • Trade negotiators from the U.S., Canada and Mexico have been working around the clock in Washington D.C. to finish negotiations and achieve a deal “in principle” before the Mexican election on July 1. The administration also wants a deal by the end of May so that the trade agreement has six months, as required by the U.S. Congress, to be analyzed and approved before the U.S. congressional mid-term elections in November.
  • Recent negotiations have largely focused on “rules of origin,” particularly for the automotive sector. The Trump administration initially demanded that North American-built cars contain 85 percent content made in NAFTA countries by value, up from 62.5 percent. Recent reports suggest that the U.S. has lowered this figure to 75 percent, and the Canadian delegation acknowledges that progress has been made.
  • Meanwhile, two particularly thorny U.S. proposals, the “sunset clause” that would require NAFTA to be renegotiated every five years, and the removal of the investor-state dispute settlement (ISDS) clause, remain unacceptable by the business communities in all three countries.

What are people saying?

  • “Now our time is running very short. I fear that the longer we proceed, the more political headwinds we will feel.” – United States Trade Representative Robert Lighthizer in Mexico City in early March
  • There is a real possibility that we could arrive at an agreement within the next several weeks.” –U.S. Vice President Mike Pence on the margins of the Summit of the Americas on April 14
  • ”My negotiating team is practically living in Washington.” – Mexican Economy Minister Ildefonso Guajardo in mid-April
  • “There’s positive advances that have been made, but it’s not over ’til it’s over.” – Canadian Prime Minister Justin Trudeau in Halifax, Nova Scotia on April 21
  • “We fully trust and we have optimism as well that we’re going to be concluding the renegotiation, modernization of the North American Free Trade Agreement with North America, as I have said, ensuring benefits for all its partners.” – Mexican President Enrique Peña Nieto on April 22
  • “Mexico, whose laws on immigration are very tough, must stop people from going through Mexico and into the U.S. We may make this a condition of the new NAFTA Agreement.” – U.S. President Donald Trump tweeted on April 23
  • “But we’re doing very nicely with NAFTA. I could make a deal really quickly, but I’m not sure that’s in the best interests of the United States. But we’ll see what happens.” – U.S. President Donald Trump said in Washington, D.C. on April 24
  • “There is a very strong, very committed, good faith effort for all three parties to work 24/7 on this and to try and reach an agreement.” – Canadian Foreign Minister Chrystia Freeland in Washington on April 25

What’s next?

On April 27, the NAFTA negotiators from the United States, Canada, and Mexico ended their talks in Washington without reaching agreement by the new deadline of May 1. Talk are set to resume on May 7, with the aim of getting a deal done “in principle” in May. The delegations from the United States, Canada, and Mexico are expected to continue focusing on rules of origin and the automotive sector, which pose the largest challenges at this juncture. However, if the NAFTA negotiations do not reach a major breakthrough during this current stage of overtime, then the prospects for a “win-win-win” outcome may be eclipsed by a “sudden death” scenario triggered by the Mexican presidential elections on July 1 and then the U.S. midterm elections in November. In this case, the result would be no new deal.