Sparks could fly when trade negotiators for U.S. President Donald Trump, Canadian Prime Minister Justin Trudeau and Mexican President Enrique Pena Nieto meet Aug. 16-20 in Washington. Their task: Begin renegotiating the North American Free Trade Agreement. At 23 years old, Nafta is long in the tooth but also responsible for tripling U.S. trade with Canada and Mexico to $1.2 trillion of goods and services last year, from about $350 billion in 1993. The good news for free traders? Trump has largely stopped talking about ripping up Nafta and slapping tariffs on Mexico and Canada. Each leader has a list of must-haves and wish-fors, some of which could be deal-breakers for the other two. Here are some of the major sticking points:
1. The Big Prize for Trump
The U.S.’s small goods-and-services trade surplus with Mexico before Nafta turned into a deficit of $63 billion last year, which Trump says is evidence that Nafta has been a bad deal for the U.S. Seeking a big win after recent setbacks on health care and immigration, Trump wants the Nafta talks to deliver the prize he most desires, a lower trade deficit with Mexico. When it comes to Canada, Trump has said he can live with “tweaks,” probably because the U.S. had a $7.7 billion surplus with Canada last year and dozens of U.S. states count their northern neighbor as their biggest export market.
2. Settling Disputes
When Nafta was first negotiated, Canada pushed the U.S. to create special panels to settle disputes over duties and tariffs, fearing that U.S. courts would favor American companies. The stakes over what’s known as Chapter 19 panels (named for the section of Nafta that created them) are high, with the U.S. saying they should be discarded and Trudeau saying they’re “essential.” Canada has used the panels to fight duties on exports of softwood lumber to the U.S. Mexico’s economy minister, Ildefonso Guajardo, says Chapter 19 doesn’t undercut U.S. sovereignty and that some dispute-settlement clause must remain.
3. Who Really Made That?
What makes a car or a can of paint a North American product? Nafta’s “rules of origin” lay out the percentages of components in a product that must be from one of the three nations to qualify for tariff exemptions. The U.S. wants higher percentages. Automakers are resisting, arguing that it would add red tape and increase costs, and ultimately leave integrated North American factories vulnerable to cheaper cars from Europe and Asia. Mexico says that, while it isn’t opposed to reviewing rules of origin in some industries, in other areas tightening them would be “shooting ourselves in the foot.” For the record, a car needs 62.5 percent of the vehicle’s value to qualify and a can of paint needs at least 50 percent.
4. Autos -- Another Trump Sore Point
Mexico has emerged as an auto-making powerhouse within Nafta, sending an average of $4.3 billion of parts and $2.6 billion of finished vehicles a month to the U.S. over the last five years. Most new auto factories in North America have gone to Mexico, a sore point for the U.S. and Canada. Trump has moved away from his earlier call for a tariff on Mexican auto products, and may now use other tactics, such as forcing Mexico to agree to higher wages and labor standards, to try to take back market share.
5. Buy American
U.S. governments have long advanced policies to shield public-works projects from foreign bidders, which can result in countries retaliating by blocking U.S. corporations, such as General Electric Co., from winning foreign business. Trump seeks a revival of “Buy American” clauses without offering Canada and Mexico similar concessions, a position that may be hard to maintain at the bargaining table. Canada says it’ll resist buy-local provisions, which could become a chip the U.S. will give up in exchange for concessions elsewhere.
6. Welcome to the Digital Age
Nafta was written before most people owned mobile phones. All parties agree the treaty should be upgraded to recognize digital services, but how to do that is contentious. Another tricky spot: Canadian retailers oppose raising limits on duty-free imports to $800 because they fear that would only shift more sales from Canadian retailers to U.S. websites like Amazon.com. Cargo companies are also eager for rules allowing goods to be tracked and approved by customs agents electronically instead of sitting at border crossings. Technology companies want more access to Nafta’s work visas, like the “TN” version that would allow programmers to move among the three nations. The U.S. has resisted this. Mexico has said that U.S. complaints about Mexico’s low wages could be addressed by allowing more workers to move between the two nations.
7. If Not Paris...
Trump refuses to abide by the Paris climate-change agreement and has weakened domestic environmental rules, yet he wants Nafta’s existing side deals setting environmental and labor standards brought into the main text to make them easier to enforce. The Trans-Pacific Partnership, which President Barack Obama completed but Trump repudiated before Congress could vote on it, would similarly have brought Nafta’s environmental and labor rules into the regular text. Trudeau especially wants efforts to reduce carbon emissions added to the deal. Since he’s staked his reputation at home as a green leader, Trudeau won’t wish to be seen as caving to Trump on the issue.
8. Currency Wild Card
The U.S. has asked for a chapter on currency manipulation. It may get more than it bargained for: One country’s sensible monetary policy can be another country’s idea of currency manipulation. During the global banking crisis, for example, the U.S. Federal Reserve’s loose monetary policy weakened the greenback and led to manipulation accusations by other countries whose currencies strengthened and exports declined.
The Reference Shelf
- QuickTake explainers on Canada’s booming economy and changing global attitudes toward free-trade deals.
- QuickTake Q&As on spats between the U.S. and Canada over dairy and softwood lumber, and between the U.S. and Mexico over a border wall.
- Wilson Center researchers map out how to reshape Nafta.
- A profile of the U.S. trade representative, Robert Lighthizer.
- A Bloomberg Prophets column on the stakes for Mexico in the trade talks.
- A Bloomberg View editorial says Nafta hasn’t been such a bad deal for the U.S.
— With assistance by Andrew Mayeda