January 3, 2018
Ongoing negotiations in combination with US President Donald J. Trump’s threats to withdraw from the North American Free Trade Agreement (NAFTA) unless major concessions are made to serve US interests have unnerved many in all three participating countries who understand that more than the future of a free trade agreement is at risk.

All three participating countries agree that today’s economic and business realities are markedly different from those of 1994 (when NAFTA initially took effect), and thus are in favor of updating an agreement that better fits the needs of a twenty-first century economy. However, Canada and Mexico are unlikely to accept a deal that shifts trade flows solely in the United States' favor.

The latest round of negotiations took place in November 2017, to be followed by another set of discussions on January 23.

Assuming all parties—the United States, Canada, and Mexico—continue to agree to meet and discuss the terms of the twenty-three-year-old deal throughout 2018, an unsuccessful renegotiation would not only hurt millions of US workers whose livelihoods depend on the success of the trade deal, but it would also cause significant harm to US interests beyond North America.

In the midst of the Berlin crisis of 1961 that cemented the dislocation of the German capital, former US President John F. Kennedy addressed both the United States and the Atlantic community with the following words: “We cannot negotiate with people who say what's mine is mine and what's yours is negotiable.” In all disputes, there is no quick and easy solution to reach an agreement that benefits all parties equally, especially if it involves multiple countries. Nevertheless, Kennedy’s words offer a timelylesson: a position of compromise and consideration of the perspectives and needs of the opposition can bring about successful agreements and enduring partnerships.

In late November 2017, the fifth round of NAFTA negotiations concluded in Mexico City. So far, progress has been made in the minor and more technical issues of the accord, including digital trade, the establishment of a NAFTA Trilateral Small and Medium Size Enterprise (SME) Dialogue, food safety, and sanitary and environmental standards.

Although it is common for trade negotiations to tackle relatively straightforward issues first and turn to thorny questions later, little to no progress has been made on major points of contention such as rules of origin, dispute settlement mechanisms, and the permanence of the agreement. Due to Mexican presidential elections in July 2018 and US mid-term elections in November of next year, the negotiation process will likely extend into 2019.

The main sticking points

Currently, there are three main sticking points in the negotiations for all participating countries. The first key disagreement is over rules of origin, which determine what percentage of a product needs to be made in North America to be entitled to preferential tariff treatment under NAFTA. Currently, if 62 percent of a car’s materials are made in Canada, Mexico, and the United States, it has preferential tariff access in North America. The other 38 percent of material can come from elswhere, including China. During the last round of negotiations, the United States proposed that half of all content of automobiles traded within the terms of NAFTA be from the United States and that the total required North American content rise from 62 percent (currently the highest of any trade agreement) to at least 85 percent. From the Canadian and Mexican perspective, country-specific rules of origin are considered non-starters, or barriers to the start of negotiations, as they could eliminate North America’s competitive edge in the global automotive sector. A study commissioned by the Motor and Equipment Manufacturers Association (MEMA) and conducted by The Boston Consulting Group (BCG), warned that a NAFTA withdrawal would impact the automotive industry, putting up to 50,000 US supplier jobs at risk. 

Compromise scenario: Economically speaking, North America can only compete against the upcoming Asian economic and trade power as a unified block with integrated supply chains. With the United States’ specific automotive content requirement in NAFTA labeled “not viable,” by its Canadian and Mexican counterparts, the White House may need to be more flexible and accept Mexico and Canada’s call for content to be measured regionally instead of nationally.

A second issue centers around the dispute settlement mechanisms, specifically chapter nineteen of the existing agreement, which allows the private sector to challenge protectionist tariffs and non-tariff barriers that governments try to impose on imports. Currently this takes place in an international tribunal with representatives from all three countries, but the United States would like to move this process to the US court system. Canada, on the other hand, has repeatedly stated that the NAFTA dispute settlement mechanism cannot be eliminated or weakened and should remain independent of any single national justice system. Thrashing chapter nineteen would go against the letter and spirit of the level playing field that NAFTA seeks to create. Canada could walk away from the negotiating table if an independent dispute resolution mechanism is not reached.

Compromise scenario: Gutting dispute settlement mechanisms would make it easier for any country to implement protectionist practices to the detriment of the other two in the trade agreement. A middle ground solution would involve creating an opt-in provision for dispute settlement. This means that, instead of automatically addressing complaints in accordance with the stipulations of chapter nineteen—if previously agreed by the parties involved—an alternative option would be to settle disputes through independent mediation panels where all stakeholders are equally represented.

A third issue is the United States’ proposal of a new sunset clause that would terminate NAFTA every five years. Currently, NAFTA has no expiration date in order to secure investments. The underlying assumption from Canada and Mexico is that a sunset clause would ultimately drive down confidence and hurt long-term investment in the region, two of the big wins under NAFTA.

Compromise scenario: Mexico has already presented a counter offer to the United States’ proposal of a sunset clause, instead suggesting periodic reviews of the pact. A concession of this sort could help modernize the agreement every certain number of years without hurting investor confidence in the region.

The bigger stakes for the United States

In sum, compromises like those mentioned are key to driving the negotiations forward. All parties must recognize what is at stake and why they must get this deal right. A failed renegotiation sends the wrong message to the rest of the world. Further, unwillingness to compromise would only hurt US credibility and its leadership role around the globe, and would also impact the country’s systemic interests and its relationship with its North American counterparts. In the same way, opposing openness and rules-based systems would hurt US standing as a partner in the region and would open new spaces for other countries such as China, who have already made overtures to many countries in Mexico’s neighborhood, to set the trade and labor standards of the future, ultimately hurting workers in the region.

As long as all countries are willing to give and take, the United States will always be better off with healthy and prosperous neighbors. Consequently, if anything has been learned from the past, it is that compromise is more than a reasonable solution in order to protect successful agreement and avoid ending strategic partnerships with our allies.

Diego Marroquin Bitar is a former intern at the Atlantic Council’s Adrienne Arsht Center for Latin America. You can follow him on Twitter @diegombtr.

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