The full version of this article first appeared on BRINK.
In October, at the fourth round of the NAFTA renegotiations in Washington, several U.S. proposals caused major problems for both Canada and Mexico—and many interested parties in the United States. Among those proposals were:
Five-Year Sunset Clause—This proposal would terminate the entire agreement after five years unless the parties decided to renew it. Such a clause would create major uncertainty. Most investments designed to take advantage of a trade agreement are amortized over a much longer period than five years.
Dispute Settlement—NAFTA contains three types of dispute settlement: the normal intergovernmental procedure for resolving disputes between the three countries about the interpretation of the agreement, special binational panels for resolving disputes about whether antidumping and countervailing duties are applied in conformity with domestic law, and investor state dispute provisions.
On the intergovernmental procedures, the United States has proposed they become advisory in nature, by allowing parties to declare the findings of dispute panels to be erroneous and thereby ignore the findings.
On the special binational panels, the United States has proposed they be abolished. Canada and Mexico strongly oppose this.
On investor state, the United States has proposed weakening the criteria used to determine violations and giving parties the right to opt out of the system entirely.
There is a pattern here. The Trump administration does not want to have its freedom of action fettered by international obligations and doesn’t seem to mind if a revised NAFTA does not provide effective ways to defend American interests from actions by Canada or Mexico. Canada has drawn a line in the sand on dispute settlement: To be worthwhile, any trade agreement must have effective dispute settlement provisions to ensure the rules are respected.
Automotive Rules of Origin—Under NAFTA, at least 62.5 percent of all passenger vehicles must be of material from North America to be able to qualify for duty free treatment between the NAFTA parties. The United States has proposed this percentage be increased to 85 percent and that, separately, 50 percent of the content be from parts made in the United States. Such changes to entrenched supply chains would have devastating effects on carmakers, parts producers and regional economies that depend on auto sector jobs.
A Long and Bumpy Road
It is not unlikely that negotiations will carry on beyond the 2018 midterm elections. It may well be that President Donald Trump will announce at some point that the United States intends to withdraw. If that happens, things could get messy; no one is really sure if the president has the authority to withdraw the United States from NAFTA without the consent of Congress. So, there would be a lot of uncertainties.
The fact that business is finally starting to pay a lot more attention to the negotiations is quite significant and could have a positive impact on the outcome if they communicate their concerns effectively to the public, their employees and Congress.
There will be a lot of bumps in the road, but in the end I believe we will be able to maintain NAFTA, hopefully with some improvement.