Crunch time for NAFTA

High-level trade representatives from the US, Mexico, and Canada meet in Washington today for a new round of NAFTA renegotiation talks. With a presidential election in Mexico looming on 1 July and US congressional elections on 6 November, the pressure is on to strike a deal this month to minimize political interference and leave sufficient time for an arduous legislative approval process—especially in the US. These are three key outstanding issues the talks need to address:

1. Automobile rules of origin. Given their significant position in American manufacturing and North American trade, autos have been a focus of the US administration's desire for a better NAFTA deal. Efforts have centered on increasing the share of content that must come from one of the three signatory countries for an automobile to qualify for duty-free status, the so-called rules of origin. The US first proposed that regional content requirements be increased from 62.5% to 85% and included a 50% American content requirement. Mexico and Canada have presented several counterproposals, though none have been sufficient to satisfy all parties. US negotiators recently modified their demands in an attempt to incentivize higher Mexican wages with a proposal that 40% of light-duty vehicle and 45% of pickup truck components be produced by auto workers making a minimum wage equivalent to $16 dollars per hour. They also adjusted the regional content requirement to 70%-75%, depending on the type of car part. Representatives of Mexico's politically powerful auto industry immediately rejected the proposal. Nonetheless, the efforts to align positions are continuing.  

2. Dispute settlement systems. President Donald Trump's administration wants to eliminate or weaken the mechanisms (common in trade deals) that allow firms and countries to challenge discriminatory treatment by foreign governments and win compensation. Administration officials have criticized these provisions as undermining US sovereignty, and the US has suffered some adverse rulings, such as in the dispute with Canada over softwood lumber products. Canada and Mexico, however, consider the elimination of dispute mechanisms a red line and are fighting for their preservation. They are also highly valued by US businesses for the protection they offer in foreign dealings. US trade representative Robert Lighthizer has signaled some flexibility on the issue in response to pressure from congressional Republicans, but he has yet to significantly waver from the original demand.

3. Sunset clause. Also highly controversial is a US proposal to allow the NAFTA agreement to lapse every five years unless the parties agree to renew it. This would allow officials to reevaluate the impact of the deal on trade flows at relatively frequent intervals. Canada and Mexico have rejected the proposal, arguing that it would create business and investment uncertainty, and the North American business community is opposed for the same reason. A potentially palatable counterproposal has been to have a periodic revision of the deal instead of an automatic termination; however, the US has not yet backed down from its position, leaving uncertainty surrounding the issue. 

Despite the difficulties, all three NAFTA members have been signaling they want to strike an agreement this month so that the legislative approval process can begin. In a notable shift, the Trump administration—which demanded the renegotiation and has repeatedly threatened to withdraw from the 24-year-old pact—has adopted a more constructive stance, partly to give the president a win on trade and to give Republicans some momentum heading into the midterm elections.