Political leaders in Canada, Mexico and the U.S. continue to review the possibility of either renegotiating or withdrawing from the North America Free Trade Agreement, or NAFTA. Businesses in all three countries are doing their best to try to predict what could happen if the NAFTA were to be renegotiated or terminated. Uncertainty arising from such questions continues to affect their current operations, as well as their future trade and investment plans.
The Mexican government has announced that it has entered into a 90-day consultation period during which it will liaise with Mexican business and industry to develop a sensible course of action to take in a proposed NAFTA renegotiation. In addition, Canadian and US leaders have recently met to discuss making certain “tweaks”, or relatively minor adjustments, to the NAFTA and its impact on US-Canadian trade policy. The only thing that one can say with certainty at this point is that changes in the current terms of NAFTA are possible, and may even be likely, over the course of the remaining months of 2017.
Numerous lawmakers and business leaders from all three NAFTA countries have stated that opportunities exist to “improve” and “upgrade” NAFTA. Such areas include rules of origin, investor-state dispute resolution, intellectual property and online commerce, labor and wage standards, environmental issues, transboundary energy and natural resources matters, among others.
2. BORDER ADJUSTMENT TAX
Policymakers in the US also continue to debate the merits of implementing a “Border Adjustment Tax”. The proposed border tax would be imposed on all US businesses that import products into the US from abroad at a rate of, for example, 20% of the value of such exported goods. To balance the impact such a border tax would have on US businesses, related proposals to restructure the US corporate taxation system would exempt income from export sales made by US companies. Such a substantial change in US corporate tax policy has thus far met with significant resistance in some quarters of the US Congress, where a significant overhaul of the US taxation system has not been enacted since 1986.
Under proposed Border Adjustment Tax legislation, US companies could no longer deduct the cost of imported raw materials they incorporate into their products or that they resell in the US. Conversely, and as noted above, revenue from a company’s export sales would no longer count as taxable income for US corporate tax purposes. In this scenario, taxable corporate profit would essentially be the company’s domestic sales, minus the amount of domestic costs. Thus, imported items would be taxed while exported items would be effectively subsidized by. Such a tax would have many “winners” and “losers” and would have larger implications on the value of the US dollar and global trade generally.
- What are the latest positions of the parties with respect to NAFTA? Mexico and Canada have declared their intentions to renegotiate NAFTA, excluding any possibility to enter into bilateral agreements between them.
- What are the latest declarations of the US with respect to the renegotiation of NAFTA?
In an interview with the U.S. Commerce Secretary, Wilbur Ross, on March 3, 2017, Mr. Ross stated that the Mexican currency could recover quite a bit if the US reaches a sensible agreement on NAFTA.
“The peso has fallen a lot mainly because of the fear of what will happen with the North American Free Trade Agreement. I believe that if we and the Mexicans make a very sensible trade agreement, the Mexican peso will recover quite a lot”.
After this statement, the US dollar fell sharply against the Mexican currency, dropping 0.74 percent to 19.84.
Previously, Mr. Ross had also stated that NAFTA would be an early priority for his department, and that he was "pro-trade," but only as long as it is "sensible trade."
- What is the position of Canada with respect to the renegotiation of NAFTA?
The Foreign Affairs Minister of Canada, Chrystia Freeland, has stated that any future talks on the NAFTA should involve all three member nations, including Mexico, because the NAFTA is an agreement among three nations, so if there is any negotiation, it should involve all three countries.
- When will the NAFTA negotiations begin?
Mexico’s Secretary of Foreign Affairs Luis Videgaray recently stated that the renegotiation of NAFTA will begin in June 2017, when all the parties involved are in the same position to renegotiate.
- What is the position of Mexico with respect to the renegotiation of NAFTA?
Mexico’s Secretary of Economy, Ildefonso Guajardo, stated that, if any proposed renegotiation does not provide Mexico with clear benefits, the Mexican Senate would not approve any such proposed renegotiated terms of NAFTA.
As we noted in our first NAFTA 2017 CCN Special Report, Secretary Guajardo also stated that in the event of an unsuccessful negotiation, Mexico’s plan B may be to impose higher import duties on goods imported from the US.
The Secretary of Foreign Affairs, Luis Videgaray, has also made declarations in this context. In a private meeting with the Mexican Chamber of Representatives (Cámara de Diputados), he stated that if the US imposes higher rates on Mexican goods, Mexico may take similar actions.
- Has Mexico implemented any actions in the past few months with respect to its trade relations?
Yes, Mexico is now initiating talks to negotiate free trade agreements with countries that would have been members of the Trans-Pacific Partnership agreement, such as South Korea.
- Have US industry leaders expressed their opinions with respect to a proposed US withdrawal NAFTA?
Yes, some industry, consumer, labor, governmental and community leaders in Texas have expressed their disagreement with respect to the possible US withdrawal from NAFTA. One-third of the goods imported into Mexico by the US, are exported from Texas. Withdrawing from NAFTA would have a direct negative impact on the exports originating in Texas.
- What should companies currently doing business in the NAFTA region do?
Companies engaged in trade and investment in the NAFTA region should closely monitor and participate in NAFTA developments. Fast-moving developments will likely occur throughout the rest of 2017. Specifically, such companies should consider (i) working closely with their external advisors, industry chambers and government representatives; (ii) reviewing potential alternatives that may exist in their respective sectors and markets; (iii) consulting trustworthy sources of information on NAFTA developments; (iv) forecasting how potential changes could affect their supply chains; and (v) conducting self-assessments to review compliance with current NAFTA rules.
The question of what will happen, if anything, to NAFTA is an international matter to be determined by the three NAFTA member countries. According to Mexican government officials, it is possible that discussions on a proposed renegotiation could occur beginning in May or June of this year.
The proposed Border Adjustment Tax is, however, a US domestic political question that will be debated as part of a larger proposed US corporate tax overhaul designed to encourage US companies to source and manufacture more goods in the US.
CCN will continue to monitor developments related to the proposed NAFTA renegotiation and Border Adjustment Tax, and will continue to report important developments to its clients, friends and professional contacts.