September 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.

President Donald J. Trump placed NAFTA and its discontents at the center of his presidential campaign and has criticized the deal relentlessly throughout his presidency, threatening to unilaterally withdraw while holding out the prospect that his administration would try to negotiate a better alternative. Late last month, the efforts to renegotiate NAFTA seem to have led to a possible preliminary agreement. 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.” Then in May we asked whether the NAFTA negotiations were in “overtime or sudden death?” Even at this point, the negotiations are ongoing and any talk of an agreement is “preliminary” as various issues between the United States and Mexico have yet to be resolved and Canada has not signed on.

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. At this point negotiations entered a “permanent round” all summer.

What’s happening now?

On August 27, President Trump announced that the U.S. had reached a preliminary agreement with Mexico. He made this announcement in the Oval Office while placing a call to Mexican President Enrique Peña Nieto on speakerphone. Negotiations with Canada for their entry into the preliminary agreement then took place August 28-30 with President Trump saying he expected them to end by the 31. As of September 4, the Canadians have not signed on.

On August 31, the Trump administration notified Congress that there is an updated deal, starting the 90-day clock on Congressional notification that is required before the president can sign a new trade agreement. This also opens the possibility that the new U.S.-Mexico Trade Agreement could be ratified during a lame duck session of Congress after the November mid-term elections and before the next Congress is seated on January 3, 2019. However, the current Congress has stressed that they want to see Canada included in a final deal.

During the last several months of negotiations, the U.S. and Mexican trade delegations focused on “rules of origin” 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 but then lowered this figure to 75 percent, which is where the content requirement stands in the most recent iteration of the deal. In addition, 40 percent of automobiles must be made by workers earning $16 per hour or more.

The contentious sunset clause that would require NAFTA to be renegotiated every five years was replaced by an agreement to review the deal in six years, with a phase-out time frame of 10 years if one or both sides decided not to continue with the agreement. The U.S. did continue its insistence on the removal of the investor-state dispute settlement (ISDS) clause (also known as Chapter 19).

Both the ISDS clause and the U.S. aim to increase intellectual property rights and extensions of copyright protections to 75 years from 50 are not supported by the Canadians. In addition, the U.S. and Canada remain mired in contentious discussions about the dairy industry. Trump has insisted that Canada reduce its tariffs on dairy which would be a significant concession for Canada. Canada was reportedly considering lowering protections on its dairy market so as to save the ISDS clause.

What are people saying?

  • On August 27, President Donald Trump said "NAFTA" as a name would be scrapped because it has "bad connotations." When he spoke with President Peña Nieto he noted, "It's a big day for trade. It's a big day for our country."
  • On August 27, Mexican President Enrique Peña Nieto said, “It is our wish Mr. President that Canada will be able to be incorporated in all of this.”
  • On August 27, Senator Orrin Hatch, chairman of the Senate Finance Committee, said, “Today’s announcement by the United States and Mexico is an important step toward modernizing NAFTA, the largest free trade zone in the world… To achieve that goal, a final agreement should include Canada.”
  • On August 29, Canadian Prime Minister Justin Trudeau initially said regarding the Friday, August 31 deadline, “We recognize that there is a possibility of getting there by Friday, but it is only a possibility, because it will hinge on whether or not there is ultimately a good deal for Canada. No NAFTA deal is better than a bad NAFTA deal.”
  • On August 31, U.S. Trade Representative Robert Lighthizer said, “Today, the president notified Congress of his intent to sign a trade agreement with Mexico – and Canada, if it is willing – 90 days from now. We have also been negotiating with Canada throughout this yearlong process. This week those meetings continued at all levels. The talks were constructive, and we made progress.”
  • On August 31, Canadian Foreign Minister Chrystia Freeland said. “We’re not there yet….We know that a win-win-win agreement is within reach. With goodwill and flexibility on all sides, I know we can get there.”
  • On September 1, President Donald Trump tweeted: “I love Canada, but they’ve taken advantage of our country for many years!” He later tweeted: “There is no political necessity to keep Canada in the new NAFTA deal. If we don’t make a fair deal for the U.S. after decades of abuse, Canada will be out. Congress should not interfere w/ these negotiations or I will simply terminate NAFTA entirely & we will be far better off.”

What’s next?

The Trump Administration has started the 90-day clock to sign a U.S.-Mexico trade deal in November, but Congress remains skeptical about a Mexico-only deal. The administration now has less than 30 days to present the text of the Mexico deal to Congress, while concurrently negotiating a new deal with Canada. In theory, Canada could join the agreement with Mexico as it is written but this seems doubtful considering their deep opposition to several clauses. Reportedly, Congress has seen little of the current deal and the text itself could prove controversial.

We will continue providing updates as the NAFTA negotiations with Canada evolve.