Vengeance is a factor in post-NAFTA planning
by Eric Kulisch (feat. Eric Miller)
November 28, 2017
WASHINGTON -- The fifth round of meetings to renegotiate the North American Free Trade Agreement ended last week in Mexico City, and it didn't go any better than the ones before.
Technocrats made progress on many chapters, including digital trade and labor standards. But tensions are increasing over the core U.S. demands, including greater North American and U.S. content in automobiles, and an automatic five-year expiration unless all parties agree to renew.
Mexican and Canadian officials continue to bristle at the U.S. demands, while U.S. Trade Representative Robert Lighthizer blames his counterparts for being inflexible.
"Thus far, we have seen no evidence that Canada or Mexico are willing to seriously engage on provisions that will lead to a rebalanced agreement," he said in a statement following the Mexico City round. "Absent rebalancing, we will not reach a satisfactory result."
Negotiators have extended talks into the first quarter of 2018, but the hard-line U.S. positions -- primarily aimed at addressing the narrow issue of trade deficits with Mexico -- continue to feed fears that the 23-year-old trading bloc could be scuttled.
Trump administration officials may believe leaving NAFTA is better for the economy than staying in, but it's not clear they've thought through all the knock-on effects, including targeted retaliation by Canada and Mexico if the U.S. exits.
There's an equal chance that President Donald Trump will trigger a withdrawal from NAFTA in the spring or that the parties will decide to pause for the Mexican elections and then resume negotiations without artificial deadlines, says Eric Miller, a well-connected trade consultant and president of Rideau Potomac Strategy Group.
The least likely scenario is that negotiators strike a deal early next year.
All sides are still fully invested in reaching an agreement because NAFTA on balance has been a net positive for all three nations and especially beneficial to industries such as automotive and agriculture.
But prudent companies and governments are already developing contingency plans.
Canada's biggest insurance policy is diversification, with Prime Minister Justin Trudeau heading to China next month to discuss a possible trade alliance and talks on track for the 11 remaining Trans-Pacific Partnership countries to cement a multilateral trade deal in the spring.
In the case of U.S.-Canada trade, governments and industry should begin thinking about how a resurrected U.S.-Canada free trade agreement would look.
Many legal experts note that the pre-existing U.S.-Canada FTA was suspended when NAFTA went into effect and that bilateral trade relations will automatically default to it. But Miller, a former policy executive at the Business Council of Canada, says Congress will likely have to vote on renewal and will want to modernize the pact.
He suggests that U.S.-Canada pact's chapter on rules of origin is too vague. To prevent disputes such as the one three decades ago when U.S. Customs wouldn't certify Honda vehicles assembled in Ontario as duty-free, he said, a new U.S.-Canada FTA should adopt NAFTA's uniform regulations -- the commonly agreed guidebook on how to interpret the rules of origin.
Meanwhile, if negotiations go off the rails, Mexico and Canada might look for ways to exact revenge.
Mexican and Canadian trade officials are too smart to use blunt trade instruments that could get their nations crosswise with the World Trade Organization and open them to authorized retaliation. Besides, they will want to deliver the pain faster since the WTO dispute resolution process takes two years.
Trade experts say retaliation will be targeted and indirect, focusing on key U.S. export industries and areas of bilateral cooperation.
"We've gotten signals from both governments that there are a lot of levers that could be pulled, and some of those levers aren't even trade," said Vanessa Sciarra, vice president for legal affairs and trade policy at the National Foreign Trade Council.
Mexican buyers, for example, could buy more corn and other agricultural products from South America, rather than U.S. suppliers. Mexican customs inspectors could drag their feet processing cargo, leading to lengthy shipping delays at the border. Mexico could also stop cooperating on criminal investigations or interdictions of Central American migrants before they reach the U.S.
Apart from NAFTA, countries could also retaliate if the U.S. raises tariffs to protect U.S. steel makers.
Patience among trading partners has run thin across all trade fronts, Sciarra said, and "If the administration does something on steel, I think retaliation will be swift."
European Union officials have informally signaled that they won't wait for a WTO panel to weigh in and will instead look for an immediate and creative response, she added.
In the NAFTA context, retaliation will likely depend on how the deal fails, Miller said. If Trump takes actions that are deliberately injurious to Mexico or says harsh things about the country, officials there will feel compelled to respond.
The next round of NAFTA negotiations is scheduled for Jan. 23-28 in Montreal. In the meantime, midlevel negotiators will continue to hold meetings in Washington to iron out less controversial chapters.