The NAFTA talks will not be fast…or friendly

The NAFTA talks will not be fast…or friendly

By Peter Clark
August 16, 2017

I’m off to Washington for round one of the NAFTA 2.0 negotiations. There may be some minimal harvesting of low-hanging fruit this week. President Trump wants more, of course.

He needs something to distract from the daily disintegration of his administration. NAFTA must be demolished and rebuilt to his design — or perhaps just scrapped like the TPP.

The presentations Wednesday by the representatives of the three NAFTA nations — Foreign Affairs Minister Chrystia Freeland, U.S. Trade Representative Robert Lighthizer and Mexico’s Secretary of Economy Ildefonso Guajardo Villarreal — were set pieces, offering no real surprises. I liked Secretary Villarreal’s approach and tone, focusing on the need for transparency and the importance of building on success and not tearing apart what isn’t broken. Unfortunately, one of the players is focused on its own priorities.

The professionals are engaged in detailed work and there is enough to keep them busy for months. There are 28 negotiating groups. I understand there are ten or more groups working in parallel at any given time. Only after initial engagement and sparring will the timing become clearer.

There will not be a quick deal. My estimate is a minimum of six months of negotiation before we see anything.

President Trump’s promised fix by ‘tweaks’ has fallen victim to White House revisionism. The official U.S. line from Mr. Lighthizer is that the president now “is not interested in more tweaking of a few provisions and a couple of updated chapters. We feel that NAFTA has fundamentally failed many, many Americans and needs major improvement.”

If the press conference was supposed to project a friendly atmosphere, the friction not far below the surface signally failure. Personally, I didn’t expect anything other than chest-thumping scare tactics from Mr. Lighthizer.

The administration’s objectives for the automotive sector, more NAFTA content and more U.S. content, are potentially disastrous. Obviously the “do no harm” message is falling on deaf ears. Notwithstanding strong messages from automotive stakeholders desperate to avoid disruptive change, the steel-hawks are still in charge of the chicken coop. If the auto trade deficit is “fixed” with tougher Rules of Origin (ROO), the U.S. deficit in automotive trade could shift to new countries.

If the automotive ROOs become more onerous, the U.S. may find the industry willing to shift to other sources of steel and simply pay the duty. The U.S. Most Favoured Nation rate on autos is 2.5 per cent. Auto parts are generally dutiable at 2.5 per cent. This minimal preference will not drive sourcing decisions. Currency can move more than the duty rates without being labelled ‘manipulation’.

Can NAFTA negotiations with Canada and Mexico solve the U.S.’s overall deficit problems? Not likely. Why has the U.S. trade deficit increased? Look no further than the trade deficit with China over the period since CUSTA and NAFTA entered into force.

It is elementary that no country can run trade surpluses with all its partners. Smoot and Hawley tried, failed miserably, and crashed the global economy. Secretary of State Cordell Hull persuaded Congress to pass the Reciprocal Trade Agreements Act in 1934. This was the start of the Most Favoured Nation approach — the underpinning of the multilateral approach to trade liberalization. Strict bilateral balancing will lead to the lowest, least ambitious possible result.

President Trump is under pressure and will want big wins, and early wins at our expense. U.S. negotiators cannot participate in a love-in. We know about Mr. Lighthizer’s instinct for the jugular, even at the best of times.

Mr. Lighthizer tried to contrast the support for NAFTA expressed by farmers, ranchers and those living near the border (you forgot the East Coast and West Coast states, sir) with lost jobs in fly-over America.

But there are other interests involved, including congressional leaders who are also pleading with the negotiating team to “do no harm”. They cannot be ignored. Hopefully, our friends weigh in to prevent further folly.

Complicating the negotiating environment is a new trade remedies petition on groundwood paper from Canada. That’s not a welcome initiative at all, with so many problems at the table – but this does not have anything to do with NAFTA. Mr. Lighthizer will say that the administration cannot deny American businesses their right to complain about “unfairly traded” imports.

I do not expect any movement on sensitive issues until close to the New Year. Four months is a long time in the land of instant political gratification and rapidly evolving priorities.

NAFTA 2.0 may not fit traditional negotiating templates. The importance of the negotiations — and the need to avoid serious, potentially irreparable damage — calls for preparation, flexibility and the considerable intelligence and experience of our world class team.

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