The Trump administration took a hard line in renegotiating the North American Free Trade Agreement (NAFTA) on Wednesday, demanding major concessions aimed at restoring the U.S. trade balance with Canada and Mexico.
First Round of NAFTA Talks Begin
On Wednesday, representatives from the U.S., Canada and Mexico descended on Washington, D.C. for a three-day meeting. Negotiations began when all three countries tabled texts that one U.S. official said would form the backbone of the next agreement. American officials say it is the first time in U.S. history that their country is renegotiating a completed comprehensive agreement.
The U.S. team is led by Trade Representative Robert Lighthizer, Canada by Foreign Affairs Minister Chrystia Freeland and the Mexican side by Economy Minister Ildefonso Guajardo Villarreal.
Negotiators face a particularly ambitious timeline for reaching a deal. They want to get it done before the Mexico election next summer, although both U.S. and Mexican officials have said they would like to conclude negotiations before the end of the year. Trade veterans say such a timeline is unprecedented.
Trump Team Comes Out Swinging
It is clear from the very beginning that President Trump is not interested in “a mere tweaking” of the trilateral pact, according to Lighthizer.
“We feel that NAFTA has fundamentally failed many, many Americans and needs major improvement,” Lighthizer said.
The Trump administration says it is looking for much tougher rules of origin, including a requirement of “substantial U.S. content” for automobiles. Lighthizer says he is prepared to use each country’s trade dependence on the U.S. as a tool for winning concessions.
The U.S. is also looking to shake-up NAFTA’s dispute settlement mechanism to allow more anti-dumping duties on its trade partners. Canada says it is willing to walk away from the table if the Americans scrap the trade dispute settlement mechanism. The “Chapter 19” provisions currently set forth under NAFTA require a bi-national panel for reaching a decision.
NAFTA’s Economic Footprint
North American trade has quadrupled since NAFTA came into force. In 2016 alone, trade between the U.S., Canada and Mexico was valued at $1.2 trillion. According to the U.S. Chamber of Commerce, North American trade has supported nearly 14 million U.S. jobs, with nearly 5 million attributed to NAFTA.
However, not all industries have benefited equally. Footwear, textiles and plastics – industries that were protected before the deal – are generally thought to be losers from the U.S. perspective. The Trump administration blames NAFTA for a direct loss of roughly 700,000 domestic manufacturing jobs.
Although NAFTA came into force in 1994, it would take an additional 12 years to eliminate all tariffs. While analysts contend that a renegotiation is sorely needed, it’ll be hard to come by without major political ramifications.
From the standpoint of investors, the NAFTA renegotiation is another source of uncertainty. Market participants can therefore expect a drawn-out debate. It’s also clear that the U.S. president is under growing pressure to follow through on his mandate. This makes NAFTA a critical piece of legislation for the White House.