Our previous international trade brief discussed the TPP-11 reaching an agreement on the “core elements” of a deal and having a contingency plan in place should NAFTA renegotiations fail. In this international trade brief, we discuss the slow progress being made during the sixth round of NAFTA renegotiations.
The sixth round of NAFTA renegotiations took place in Montréal from January 21 to 29, 2018, with Canadian Foreign Affairs Minister Chrystia Freeland, Mexico's Secretary of Economy Ildefonso Guajardo Villarreal and U.S. Trade Representative Robert Lighthizer holding a press conference on the final day to discuss progress achieved during the talks. The three officials announced the completion of the new chapter on anti-corruption, and advances on other fronts, but noted that they were quite far away from reaching a final agreement.
The sixth negotiating round was a “watershed” moment for NAFTA renegotiations, particularly after tense negotiations in the previous two rounds that appeared to suggest that the parties were at a stalemate. Canada’s challenge to U.S. anti-dumping and countervailing duties practices, launched at the World Trade Organization (WTO) on December 20, 2017, by requesting consultations with the United States, referencing systematic violations of relevant WTO rules in U.S. trade remedies proceedings against Canadian exports and those of other countries had also increased tensions in the lead up to this round. In the closing press conference for the round, Ambassador Lighthizer referred to Canada’s complaint, calling it a massive attack on all U.S. trade laws and stating that it reinforced the U.S.’s concerns about non-domestic trade dispute settlement bodies. Nevertheless, industry groups and delegations from government bodies of the three nations all took part in this negotiating round, trying to push talks forward so as to keep the process alive and on track, with some success. We summarize a few of the areas that became the focus of the sixth round:
- In regard to rules of origin for automobiles and auto parts, Canada made a proposal to counter the U.S. proposal of increasing the origin requirement for vehicles to 85% NAFTA-based content and 50% U.S.-based content. Canada’s proposal provided for a credit based on investment in the NAFTA region related to research and development and manufacturing with NAFTA-origin steel and aluminum. This proposal was supported by many in the auto industry, and U.S. negotiators had previously indicated they were open to seeing the idea fleshed out into a more refined proposal. Ambassador Lighthizer, however, later indicated that the U.S. was unlikely to support the counter-proposal as is, contending that the Canadian proposal would actually lessen the amount of NAFTA content.
- A counter-proposal was also made to the U.S. with regards to Chapter 11, which contains the Investor-State Dispute Settlement mechanism, which the U.S. would like to see as optional. Canada and Mexico have proposed leaving the U.S. entirely out of Chapter 11 (i.e., without an opt-in), which would prevent Canadian and Mexican investors from suing the U.S. government under an investor-state arbitration mechanism, but which would also prevent U.S.-based investors from suing the Canadian and Mexican governments.
- In response to the U.S.’s proposed “sunset clause,” which would have NAFTA automatically terminate in five years unless explicitly renewed by the parties, Canada is said to have proposed a semi-regular review of the treaty that would produce recommendations on how the agreement could be improved, a proposal similar to one made by Mexico in the earlier rounds.
Though some advancements have been made, talks are proceeding far more slowly than needed to have the negotiation wrapped up by the end of March, 2018. In his closing remarks, Ambassador Lighthizer expressed impatience with the current pace of negotiations, stating that the people of the three nations deserved faster progress.
Some contentious areas appear to have purposely remained off the table in the sixth round. Canada’s dairy system, Mexican labour laws, and access to U.S. government procurement, for example, are topics that did not seem to be discussed at length in this round. Based on the limited progress, it would appear that additional rounds of negotiations beyond the next one, scheduled to begin February 26 in Mexico City, will be required before a final agreement is reached.
As a result, the end of March deadline will undoubtedly be missed. Both U.S. House Ways & Means Committee Chairman Kevin Brady (R-TX) and Mexico’s Economy Secretary Ildefonso Guajardo recently downplayed the March deadline. President Trump has also shown a willingness to negotiate past March and into the summer of 2018, noting that the Mexican election in July will likely make completing a deal before then difficult.
Clearly there remains quite a bit of work to be done. However, with all parties currently willing to remain at the table and progress being made on some key issues, the prospects of a renegotiated NAFTA becoming a reality are better than they were before the commencement of the sixth round of talks.
Nevertheless, prudent business planning requires that businesses provide for a contingency plan by first assessing the impact of a failure to reach a final agreement for an amended NAFTA, and then considering means of mitigating the detrimental economic impact, which may include diversifying trade based on the existence of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the new Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Companies that are publicly traded should also consider whether to revise their risks disclosure to incorporate a discussion on the implications of failed NAFTA renegotiations and a subsequent withdrawal by the U.S. from NAFTA.