Renegotiating NAFTA: Round 7

March 16, 2018

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Round 7: February 25-March 5, 2018, Mexico City

Limited progress during the seventh round of NAFTA talks has spotlighted the growing time crunch faced by negotiators.

Mexico received the lion’s share of attention, with the country’s citizens going to the polls on July 1. Leftist Andres Manuel Lopez Obrador is the current front-runner to become president. His criticism of both the current government’s handling of NAFTA and U.S. President Donald Trump has led many to doubt NAFTA’s viability if Obrador prevails.

But U.S. midterm elections in November could also change Washington’s landscape and put a new NAFTA deal in jeopardy. And on a lesser note, Canada’s two most populous provinces will hold elections this year: Ontario in June and Quebec in October.

“Now our time is running short,” said U.S. Trade Representative Robert Lighthizer at a trilateral press conference at the close of the talks’ seventh round. “I fear that the longer we proceed, the more political headwinds we will feel.”

Negotiators have said from the outset that they would like to finish negotiations before political campaigning begins. In addition, any new deal would require congressional approval in the U.S. that could take months to obtain. If trade representatives fail to reach an agreement in time, talks could be suspended until after the elections in the U.S. and Mexico.

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Tariffs on aluminum and steel?

Complicating the road to NAFTA 2.0 was the mid-round announcement by Trump of new U.S. tariffs on steel and aluminum. The new penalties — 25 percent on steel and 10 percent on aluminum — are designed to protect U.S. industry by increasing the price of metals imported into the U.S.

Canada and Mexico were exempted from the tariffs, but Trump has implied that the exclusion depends on finalizing a new NAFTA agreement. Canada, for its part, has played down the connection and vowed to protect the country’s steel and aluminum industries.

"We don't link together the tariffs and the negotiations with NAFTA," said Prime Minister Justin Trudeau to CNBC.

What we know

Negotiators closed three chapters during the seventh round:
  • Good regulatory practices — promotes the development of a common regulatory approach among the three nations.
  • Administration and publication — guarantees access to information on laws and regulations covered by NAFTA.
  • Sanitary and phytosanitary measures — covers food safety and animal and plant hygiene, and is expected to help expedite agricultural trade. It also guarantees that safety standards are based on science.

The negotiating teams also made progress on sectoral annexes regarding chemical substances and proprietary food formulas.

Finally, officials have reported they are nearing completion of chapters on telecommunications, digital trade, technical barriers to trade, state-owned enterprises and financial services. And the three countries agreed to include a separate NAFTA chapter covering energy.

Progress in the seventh round cannot offset the relative lack of headway made thus far. Only six of about 30 chapters have been completed during the seven months of NAFTA talks. The parties can only hope for a near-term breakthrough that signals a watershed.

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Mexico: Nobody’s “third wheel”

From the time NAFTA negotiations were first announced, Canadian observers have focused on the close economic ties between two signatories to the treaty: Canada and the U.S. This is for good reason. The U.S. is Canada’s largest trading partner; Canada is the second-largest partner of the U.S., behind only China.

But Mexico and Canada enjoy a robust trade relationship — each country is the other’s third-largest trading partner. Under NAFTA, bilateral trade between the two countries has more than quadrupled, reaching about CAD$40.8 billion in 2016.

The agreement has largely benefitted Mexico. Since taking effect in 1994, NAFTA has helped liberalize its economy and create an emerging middle class.

This trend continues to accelerate. In 2014, the government reformed the energy sector in a bid to spur growth in its under-performing economy. The reforms opened the oil, gas and electricity sectors to foreign investment, ending decades of monopoly control by two state-owned companies: PEMEX (Petroleos Mexicanos) and CFE (Comision Federal de Electricidad).

Mexico’s negotiators are headed by the country’s Secretary of Economy Ildefonso Guajardo Villarreal. They continue to grapple with the same sticking points that have dominated these talks since they were first announced.

Among the most important topics for Mexico are rules of origin for automotive vehicles. Under NAFTA, 62.5 percent of the net cost of a vehicle must originate in the region to avoid tariffs. The U.S. wants to raise the level to 80 percent, but Canada and Mexico have resisted the move.

“The U.S. is the main importer of automotive vehicles assembled in Mexico, at about 77 percent of the total,” said Rita Mireya Valdivia Hernandez, a tax partner for BDO Mexico. “For Mexican auto assembly plants, it is important to maintain the current rules of origin.”

NAFTA and contingency planning

Expectations remain mixed on NAFTA’s future.

While upcoming elections have created a time crunch for negotiators, many businesses holding a large stake in NAFTA have expressed confidence — in words and action.

“The advancements made in key chapters for the fresh produce industry demonstrate that significant progress is being made during the NAFTA negotiations,” said Ron Lemaire of the Canadian Produce Marketing Association after the seventh round, though he noted concerns over unaddressed provisions.

Heineken, the second-largest brewer in the world, recently opened its new $500 million brewery in the northern Mexican state of Chihuahua.

"We chose the location because of its proximity to the U.S. and given the importance of the export business of Tecate and Dos Equis to the U.S.," said Marc Busain, Heineken’s Americas president, referencing two of the company’s brands.

If location underpins business strategy for North American companies, it also explains some of the buoyant optimism for NAFTA 2.0. Organizations increasingly look global, but they can hardly ignore the common-sense business case for close ties between three countries sharing the same continent.

“[Trump] has heard loudly and clearly from members of Congress, governors, as well as the agricultural community and me on an ongoing basis how important NAFTA is and trade is to the American farm and producer,” said U.S. secretary of agriculture Sonny Perdue.

For many Canadian businesses, the uncertainty surrounding the negotiations has limited their ability to plan. Still, some business leaders are creating their own opportunities by exploring markets that recently lowered barriers to Canadian trade, such as the European Union. Diversifying can spread the business risk. It also allows Canadian business owners to cover any NAFTA contingency and incorporate the advance planning their businesses need.

What’s next

Round 8 of negotiations will take place in Washington, D.C., in April. Negotiators from all three countries will continue to meet for “intersessional” meetings in hopes of finding further common ground.

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We surveyed Canadian business leaders to ask about the NAFTA renegotiations and the opportunities, risks and planning considerations they had identified. To read the report click here.

Additional NAFTA insights

NAFTA 2.0: Key Issues and Next Steps
Summary of NAFTA Round 1 Negotiations (Washington, August 16-20)
Summary of NAFTA Round 2 Negotiations (Mexico City, September 1-5)
Summary of NAFTA Round 3 Negotiations (Ottawa, September 23-27)
Summary of NAFTA Round 4 Negotiations (Washington, October 11-15)
Summary of NAFTA Round 5 Negotiations (Mexico City, November 17-21)
Summary of NAFTA Round 6 Negotiations (Montreal, January 23-29)
Renegotiating NAFTA: Are We There Yet?
NAFTA Renegotiation Impact on Immigration
NAFTA Renegotiation Impact on the Retail Industry
NAFTA Renegotiation Impact on Government Procurement