Nafta negotiators' race against time

Pity the poor professionals currently renegotiating the North American Free Trade Agreement (Nafta) deal. Certainly they are a sturdy, well-travelled group – familiar with each other from the Trans-Pacific Partnership talks and long used to the rigours of the road. Still, their monthly gatherings for talks on the Nafta – at time of writing, the negotiators are on the third round – must surely be taxing, and not just physically.

The US team has been given a new set of instructions from president Donald Trump’s administration. The Mexicans find themselves with less and less negotiating flexibility every time Mr Trump tweets about his wall or illegal immigrants, hardening Mexican nationals’ opinion about the president, the US and the wisdom of any sort of give-and-take in these talks.

The Canadians, ever the peacemakers, have their own agenda and though it is hard to imagine them walking away from Nafta, they have done it once before when the trade agreement was first being negotiated. The original Nafta negotiations almost failed at the last minute because the US would not agree to the dispute resolution process. Canadian negotiators went back to Canada, returning only after the US agreed to it. As it happens, one of the US objectives for this revamp of Nafta is to alter the dispute resolution process.

Clock is ticking

However, the biggest challenge to the negotiators is the calendar – namely the schedule of elections in both the US and in Mexico. If a deal is not reached by the beginning of 2018, it might not be reached at all. Mexico is holding presidential elections in 2018 and by mid-year the incumbent administration will not be able to pursue talks. The US mid-term elections are also being held in 2018, making it all but impossible for a Nafta deal to be ratified by the Senate.  

So pity the professionals who are working overtime in order not to run out of time. This could easily happen – so then what?

The situation is concerning, says Michael C Camuñez, co-founder, president and CEO of consulting firm Monarch Global Strategies. “The absence of Nafta will create some uncertainty and it will take some time to sort out,” he says.

With no new deal in place, he adds: “Mr Trump could initiate a withdrawal from Nafta if he thought he could gain a political advantage. And the Mexicans have made very clear that they will not negotiate with a gun to their head. If the US initiates a withdrawal they will walk from the table.

“If Mr Trump continues to act out with bullying tweets and denigrating messages, the presidential race will come down to which candidate can be the most anti-American,” he adds.

Consequence for Mexico

But ultimately, Mexico – and the companies that use the country as a manufacturing base for exports – would be fine even if this worse-case scenario did unfold, according to Mr Camuñez. “Mexico’s fundamentals are very sound. It is one of the most open economies in the world, with a diverse manufacturing base, excellent fiscal policy and a strong, independent central bank. There is no reason not to continue to invest in Mexico,” he says.

If Nafta is rescinded, the countries revert to the World Trade Organization (WTO) tariff schedule, which is highly favourable to Mexico, he adds, saying: “The US is the one that will take a hit because its tariffs are so low and Mexico’s are high, which means it will hurt imports to Mexico more than it would hurt exports from Mexico to the US.”

Integral to members

Not that any country wants Nafta to be rescinded. “The economic reality is that Nafta has become integral to the economic fabric of all three countries,” says R Kevin Williams, a member of Clark Hill’s customs and international trade law practice group. “For example, the supply chains for the auto plants in the US are built around operations that exists in all three countries. That would be exceedingly difficult to undo, especially overnight,” he adds.

Unfortunately, the US, Canada and Mexico are looking at everything as part of the Nafta renegotiations – nothing is off the table, according to Stephen Kho, a partner at law firm Akin Gump who is also a former associate general counsel for the Office of the US Trade Representative.

Many of the categories will be tough slogs, starting with the auto sector’s rules of origin. “The US wants more domestic content requirement or more regional content requirement and frankly that will be difficult,” says Mr Kho. Other issues will be sticky as well, such as agriculture. “It’s unclear whether lumber could even be considered part of Nafta,” says Mr Kho. "The US would like to have it in, but the Canadians want it out. There is more – such as labour issues (which will be very hard), e-commerce and intellectual property issues.”

It should also be noted that the US is asking Mexico to make some significant concessions, according to Mr Williams. “By asking Mexico to agree to changes in the rules of origin, that may make it more difficult for them to provide parts to the auto industry. We’re also asking Mexico to increase its minimum wage. So what is Mexico going to ask in return?” he says.

More time needed

In short, according to Mr Kho, redoing everything within a four-month timeframe will be exceedingly difficult. “It’s like having a 1000-piece jigsaw puzzle versus a 50-piece puzzle; you need more time to put it together, no matter how good or seasoned you are,” he says.

And therein lies a problem: it is conceivable that the negotiators can get through everything and come to a larger agreement by the year-end deadline. But it will not be pretty and could well be sloppy.

“When you are short of time, some decisions get made without full vetting and thinking through of the impact,” says Mr Kho. “It could be that there are decisions that will be made that will be later regretted – or maybe there are deals that are cut that don’t necessarily reflect what was intended.”