In our last international trade brief, we discussed Canada’s proposed countermeasures to the U.S. administration imposing aluminum and steel tariffs. In this trade brief, we discuss the status of the ongoing NAFTA renegotiations and the U.S. administration potentially pursuing bilateral trade agreements with both Canada and Mexico.

The pace of the renegotiations process for the North American Free Trade Agreement (NAFTA), which began in August 2017, has dramatically slowed, and the U.S. administration has expressed its frustration in recent days by imposing tariffs of 10% on aluminum and 25% on steel against imports from its NAFTA partners. The U.S. administration has since then also signalled that instead of a trilateral renegotiations process, it will seek to pursue bilateral trade agreements with Canada and Mexico.

Larry Kudlow, the Director of President Trump’s National Economic Council, has been quoted as stating that President Trump is now of the view that pursuing bilateral trade deals with Canada and Mexico would provide a more favourable outcome for the U.S., and also open up an easier and faster path to concluding the trilateral renegotiations of NAFTA. However, numerous Canadian officials have promptly rejected this suggested course of action, and have indicated that the Canadian government is committed to a trilateral agreement.

This abrupt change in strategy comes as the NAFTA renegotiations slowed substantially from the hectic pace set in late April and early May, during which there were what had been called, “continuous negotiations” rather than separate rounds of negotiations, with frequent impromptu meetings between senior officials of Canada, Mexico and the U.S. At the time there was hope that an “Agreement in Principle” would be reached by early May. Instead, with such an agreement appearing to be elusive, and with negotiations slowing down, the U.S. administration abruptly revoked the earlier exemption it had provided Canada and Mexico from its global steel and aluminum tariffs based on “national security” grounds. As discussed in our earlier international trade brief, these tariffs may not be consistent with the U.S.’ obligations under the World Trade Organization (WTO) agreements and, in response to the tariffs, Canada has submitted a request for consultations to the WTO, a step which initiates the complaint and dispute settlement process. Canada has also proposed countermeasure tariffs targeting a wide range of imports from the U.S., which it proposes to apply on July 1. The deadline for submissions for the public consultations is June 15, 2018. The U.S. is also considering tariffs of up to 25% on automobiles,[1] and rumours abound that President Trump is contemplating additional measures to respond to the NAFTA partners imposing countermeasures to the U.S. aluminum and steel tariffs.[2]

Given the upcoming elections in Mexico and the U.S., it seems unlikely that much progress will be made in the negotiations process in the near term. The Mexican Presidential election will take place on July 1, 2018, and may lead to a change in government, which in turn could lead to a change in Mexico’s negotiating stance on NAFTA. Similarly, the U.S. Congressional elections set to take place on November 6, 2018, could lead to a change in control of House of Representatives and changes within the Senate, making ratification of a renegotiated NAFTA that much more difficult.

There remain many contentious issues that need to be addressed in the renegotiations. The table below outlines some of the key open issues in the renegotiations, and what has been released publicly about the positions of the parties.

Table 1: Summary of key outstanding issues in NAFTA renegotiations

Topic

Current state

U.S. original proposal

Canadian and/or Mexican counter-proposal

Automotive rules of origin

60-62.5% NAFTA content.

85% NAFTA content and 50% U.S. content for vehicles (U.S. content requirement may be replaced with a wage-based requirement).

Increasing the NAFTA content requirements, while also expanding content definitions to include research and development expenditures.

Investor-State Dispute Settlement (ISDS)

Exists for persons from all parties through Chapter 11.

Allowing states to opt-in to an ISDS system, so that only states that have opted in can be the subject of investor-state claims.

Providing ISDS only to persons of states that have opted in to ISDS. If the U.S. opts out, the U.S. could not be a respondent but U.S. persons would also not be able to use ISDS against the other parties.

State-to-State dispute resolution for trade remedies

Exists for all parties through Chapter 19.

Eliminate Chapter 19.

Preserve Chapter 19.

“Sunset clause”

No sunset clause or regular reviews exist.

NAFTA expiry in five years unless renewal is agreed to by the parties.

A review of the agreement every five years, with proposals on how it could be updated.

Government procurement

No restrictions based on reciprocal value.

Limiting the value of procurements to the reciprocal dollar value of procurements that U.S. companies receive from the other parties.

No limits on the value of government procurement available to companies from any of the three countries (Mexico proposed to limit U.S. companies to the amount procured by the U.S. government from Mexican companies if the U.S. proposal is implemented).

The issues described in Table 1 represent those that are among the most difficult to address, but even once these are resolved there will be quite a bit of effort spent on the specific details of many chapters of the agreement. Given the amount of work left to do, and the political events in the near term discussed above, it seems unlikely that a renegotiated NAFTA will be approved this year. With the U.S. administration growing increasingly impatient, and with few major concessions provided by Canada and Mexico, the chances of a successful renegotiations producing a trilateral agreement in the near term seem quite dim.

As the resolution of the NAFTA renegotiations process will likely continue into 2019, in the meantime, the delay in reaching a final deal and the imposition of tariffs and countermeasures will make for a very uncertain business climate within North America. As we have advised previously, it is essential that businesses review their business strategies that were formed when this level of political risk in the North American context was inconceivable.