The International Trade Practice Group of Hogan Lovells has been closely following the developments of the ongoing negotiations between Canada, Mexico, and the United States for the modernization of the North America Free Trade Agreement (NAFTA). The fifth round of negotiations that took place in Mexico City just concluded a few days ago. Given the relevance of the issues involved we would like to share with all our key clients and contacts a status report of where the NAFTA negotiations stand to date.
Current State of Negotiations
Negotiators have now completed five rounds of talks to modernize and update NAFTA.
Although some chapters are reportedly closed, and progress has been reported in each round, including the fifth round that concluded last week in Mexico City, a great deal of work remains.
Structure of Negotiations
The work seems to be split roughly into three áreas:
The first area involves those issues that are easily classifiable as modernization items.
- This includes updating NAFTA to account for e-commerce, changes in technology, and improvements in customs procedures and practices that simply did not exist 25 years ago when NAFTA was negotiated.
- Much of this work has already been completed.
The second area involves traditionally tough issues – items like intellectual property rights (IPR) protection or agricultural market access – that the U.S. typically demands in negotiations.
- These issues are traditionally difficult for trading partners, usually because they require trading partners to make tough concessions in areas they view as sensitive.
- This is the area where U.S. negotiators often make incremental progress from agreement to agreement.
- In a typical trade negotiation, the work would focus on this second area.
The third area includes the “novel” ideas that the Trump Administration is bringing to the table for the first time.
- These include highly controversial items, such as the five year sunset clause or increased U.S. content requirements for automobile rules of origin.
The presence of this third area is attracting much of the attention and is making progress in the second area difficult to achieve.
- Most of the U.S. business community is strongly opposed to these third area items, which many are calling “poison pills.”
- Auto groups are extremely well-organized and united, and were in Mexico in force with a well-honed message about how U.S. proposals would hurt U.S. manufacturing jobs in their sector.
- Agricultural groups were also present in force in Mexico, although focused much of their comments on issues associated with withdrawal (or the threat thereof).
- Other groups – representing services, intellectual property, and others – have been active as well.
- The Mexicans, while sharing the view of the Canadians, have chosen a different approach and have selectively engaged on the proposals with extensive modifications to eliminate the most troublesome aspects.
- Although some Members of Congress – especially those typically skeptical of trade deals – have expressed support for some of the third area concepts, many are strongly opposed to these proposals as well as the overall consultation process.
- Many of the proposals have been tabled before securing Congressional clearance.
- Others have complained that the Administration is taking shortcuts on consultation procedures.
- The Office of the United States Trade representative (USTR), in fact, published an updated list of negotiating objectives (required by Trade Promotion Authority) in response to Congressional criticism on this point.
- Statements by Ambassador Lighthizer that he is primarily focused with “an audience of one,” have not gone over well in Congress, especially since Article I, Section 8 of the Constitution vests Congress with the authority to regulate international commerce.
It remains to be seen whether these third area proposals reflect full Administration intent or are a negotiating tactic.
- Following the fifth round, USTR complained that Mexican and Canadian responses to these third area proposals are making progress difficult.
Threat of Withdrawal from NAFTA
The threat of NAFTA withdrawal, which the President has tweeted or spoken about several times this year, continues to hang ominously over the talks.
- Although President Trump has stated that such talk is a negotiating tactic, the fact that it is on the table remains a distraction that is making progress (combined with the third area proposals) difficult.
- Questions about whether President Trump will go through with these threats, and what happens next, continue to dominate every conversation during the talks and is a hot topic of conversation in Congress.
- A useful resource on the withdrawal issue can be found in a Congressional Research Service (CRS) report on the topic here.
Last week, Senator Jerry Moran (Republican from Kansas) said he “got very nervous when every indication seems to me to be that the [Trump] Administration is going to terminate NAFTA, then indicate that they have six months before it actually expires to get a better deal. In other words, using it as leverage.” Moran said he is “nervous because Mexico is the largest purchaser of agriculture commodities, but also because of the aggressive nature of other countries – Brazil, Argentina – who will be very interested in taking markets that American agriculture currently enjoys.”
Mexico has said it is trying to expand ties with countries like Brazil and Argentina as a way of hedging against NAFTA withdrawal. U.S. agriculture groups said this week that the threat of a decision by President Trump to withdraw from the NAFTA could cost the U.S. economy US$15.5 billion and potentially wipe out much of the positive economic benefits of the Republican tax reform plan, said the Business Roundtable this week. (The Business Roundtable is an association of Chief Executive Officers – CEOs of America’s leading companies with more than 16 million employees and more than US$7 trillion in annual revenues.)
- Negotiators, at a technical level, will be convening in Washington in a series of meetings in mid-December (dates ranging anywhere from December 9 to 19).
- Negotiators stress that these inter-sessional meetings will not be counted as a round.
- The sixth round of talks is scheduled in Canada on December 11-15, 2018.
- Following a seventh round (that could take place in Mexico in late January or February if the rotation continues), an eighth and final round is slated for March back in the United States.
- Parties are shooting for a March 2018 completion so that the talks will be done well before Mexico enters the final stage of its Presidential election season.
- None of the stakeholders we’ve spoken to actively think the talks can close in March, but everybody is working toward that.
Despite rumors and media reports, the fact is that the representatives of the three NAFTA parties have engaged in serious negotiations. The process is not simple, but gradual progress has been made in select areas and important topics are being analyzed. As of today, because the process is still open, NAFTA is in place without real changes since it was originally adopted in 1994. However, we can conclude that legal changes will take place, the scope of which largely depend on the outcome of the negotiations. Lawmakers in all three countries will have their work cut out, depending on how NAFTA is revised or even in the undesirable scenario of a U.S. withdrawal. We will continue to follow these negotiations closely and brief our clients and friends in real time as events warrant. Our entire team is ready to help you for any specific questions that you may have now or in the future.