NAFTA talks to pick up again as threat of auto tariffs looms

July 25, 2018 - High-level talks for a new NAFTA are picking up again this week following two months of limited negotiations that were instead marred by tit-for-tat tariff battles and diplomatic fallout.

Canadian Foreign Affairs Minister Chrystia Freeland will discuss the North American Free Trade Agreement on Wednesday when she meets in Mexico City with officials from the incoming and outgoing Mexican administrations. On Thursday, Mexican Economy Minister Ildefonso Guajardo is traveling to Washington to discuss the status of NAFTA talks with U.S. Trade Representative Robert Lighthizer. The bilateral gatherings mark the most activity on NAFTA negotiations since May.

The talks, which have been under way since last August, stalled in the lead-up to Mexico’s July 1 presidential election. Andres Manuel Lopez Obrador won and takes office in December. The challenge for negotiators is picking up from where they left off, with gaping differences remaining over key issues including rules for auto content and a sunset clause that would kill the deal after five years unless the parties agreed to extend it.

Hanging over the talks are President Donald Trump’s tariffs on steel and aluminum that took effect on June 1 for Canada and Mexico, which triggered immediate retaliation from both neighbors, and the administration’s threat to impose duties on foreign vehicles and auto parts. Mexico and Canada are the largest source of auto imports to the U.S.

Trump has also threatened to scrap NAFTA or pursue individual deals, saying last week he may seek separate talks with Mexico as a priority before Canada. On Monday, Trump said he was talking with Lopez Obrador about doing something “very dramatic, very positive” on trade, though the Mexican president-elect later said he didn’t know what Trump was referring to.

August Goal

Mexico’s outgoing administration is now looking for a quick solution to NAFTA. The Mexican government is redoubling its efforts to reach a swift agreement with the Trump administration, people familiar with the matter said. Jesus Seade, named by Lopez Obrador as his chief NAFTA negotiator, will join the team on Guajardo’s trip to Washington this week.

The current Mexican administration, Canada as well as the U.S. Congress have said they support the final agreement having a trilateral structure. Lopez Obrador in a letter sent to Trump last week also urged for NAFTA to remain a three-way deal.

The White House’s strategy to divide and conquer in its negotiations on NAFTA is not a new one, said Eric Miller, a former Canadian diplomat who is now a Washington-based trade consultant with Rideau Potomac Strategy Group.

“The NAFTA negotiations appear to be repeating the same pattern that they have followed since the beginning: The United States sets unrealistic deadlines and tries to pressure their counterparts into a deal,’’ Miller said. “At present, the objective is to push Mexico to embrace an auto deal all while threatening to pursue bilateral negotiations with each country.”

Guajardo last week alluded to the possibility of an August deal. In an interview with Radio Formula, he said that in closed-door meetings with the current and incoming government's earlier this month, U.S. officials including Secretary of State Mike Pompeo indicated a desire to have a deal in 45 days.

While the stakes are high, expectations are low that this week will yield sufficient progress to finish the deal next month. And even if talks were concluded this year, key Republicans in Congress have signaled that time has run out for lawmakers to consider the new agreement for a vote before a new Congress takes over in 2019.

‘Hard to See’

“It’s hard to see an agreement in August without the U.S. falling off some of its positions,’’ Bill Reinsch, senior adviser at the Center for Strategic and International Studies, said.

A quick resolution also faces an uphill battle in Canada, where Prime Minister Justin Trudeau has little political incentive to bow to U.S. demands. Trudeau’s popularity among voters has surged since the Trump administration slapped tariffs on Canadian steel and aluminum, according to a poll by Ipsos Public Affairs.

Canadian support for revising NAFTA had been edging up until Trump imposed the metal tariffs and insulted Trudeau at a Group of Seven meeting in Quebec last month, according to Sean Simpson, vice president at Ipsos. Following the G-7, 70 percent of Canadians backed boycotting American products, according to Ipsos polling.

“It’s been a rallying cry for Canadians. Being against Trump is the only thing we can agree on,” Simpson said.

Trudeau insisted early in the negotiations that his government would be willing to consider revisions to the trade pact. But his position has hardened, with the prime minister saying at the end of May that Canada would rather have no NAFTA than a bad deal.

One potential outcome for this week’s meeting could be progress on an autos deal that would include the Trump administration’s demand for rules requiring a substantial amount of work at a higher wage to shift production from low-cost Mexico.

Yet, even if the countries succeed in getting an autos deal, NAFTA still has a long way to the finish line, Miller said.

“Imagine that one is transiting the Rocky Mountains,’’ Miller said. “It is a momentous occasion, but there are a lot of mountains left before you hit the Pacific.’’

Source: Bloomberg