NAFTA Round 6: What To Watch For

Trade negotiators from Canada, Mexico and the United States will meet in Montreal next week for a crucial round of talks on renegotiating NAFTA. This is the 6th round of negotiations, and the major demands and proposals are now on the table. Can the parties begin to work out their differences and make progress towards a deal? Here are some key issues to watch.

Poison Pills

The United States (i.e., the Trump administration) was the only NAFTA country that was pushing to renegotiate the existing agreement, so its views are important for determining whether a new NAFTA can be worked out. The Trump administration has made a number of proposals that are probably unacceptable to Canada and Mexico (and also to many members of Congress, as well as other groups). These have been referred to as “poison pills,” with some speculation that the administration offered them in the hopes that the proposals would kill the talks and give the U.S. an excuse to withdraw from NAFTA. Three of the biggest poison pills are:

– A weaker enforcement mechanism for policing violations of the agreement (not weaker than most areas of international law, but a big step backwards from what currently exists in U.S. trade agreements).

– A “sunset clause” that would have the agreement expire after five years unless the parties affirmatively decided to renew it.

– A requirement that in order for automobiles to benefit from the zero tariffs under NAFTA, 50% of their content must be from U.S. sources.

The key question for these proposals is whether the U.S. is going to keep insisting on them, or whether it is willing to accept less (e.g., a review mechanism rather than an automatic expiration clause) or even, ideally, to abandon the proposals completely.

Market Opening/Closing

A frustrating part of trade negotiations is how countries bargain over liberalization: one country liberalizes only if others do so. If they were smart, they would be competing to see who could liberalize the most and the fastest. But that’s not where we are with trade politics right now.

Instead, in the NAFTA renegotiation, some of the U.S. proposals are designed to scale back existing liberalization. For example, the U.S. wants more flexibility to follow Buy America rules in government procurement; and it wants a higher level of regional content (i.e., from Canada, Mexico, and the U.S.) in automobiles in order for them to qualify for NAFTA’s zero tariffs (this is a less egregious variation on the U.S. content requirement noted above).

At the same time, the U.S. is also pushing for market opening by others, including a demand that Canada remove some restrictions on dairy imports. Asking trading partners to open their markets is a more traditional approach to trade negotiations, and would probably get much more emphasis in these trade negotiations from any other U.S. administration. For example, the U.S. could be prodding Canada and Mexico to open up various markets for services (e.g., legal and medical services).

Specialized International Courts

While some of the U.S. NAFTA proposals are controversial and hugely problematic, others are controversial but actually have some basis. In this regard, in addition to the proposals related to basic enforcement provisions noted above, the U.S. is also complaining about two other dispute mechanisms in NAFTA, referred to by the chapters in which they fall: Chapter 19 and Chapter 11.

Chapter 19 involves a special review mechanism for domestic anti-dumping/countervailing duties that was originally demanded by Canada as part of the Canada – U.S. FTA, and was then carried over into NAFTA. Normally, anti-dumping/countervailing duties can be appealed to domestic courts; under Chapter 19, they can also be appealed to a special NAFTA panel of experts, which considers the consistency of the agency decisions with domestic law. It is arguably unconstitutional to have an international court apply U.S. law in this way, and it is not clear that the NAFTA panels offer stricter oversight than U.S. courts do. The Trump administration wants to eliminate these provisions; the Canadians are pretty adamant about keeping them.

Chapter 11 contains the notorious investor state dispute settlement mechanism. In my view, the economic value of these provisions is uncertain at best, and they are not worth the uproar they cause. This is something that the U.S. has pushed for in the past, but the Trump administration seems to be reconsidering it. 

Modernizing

Finally, there is the easy part of the NAFTA renegotiation: modernizing it. NAFTA was negotiated in the early 1990s. Since then, the economy has changed a lot, and trade agreements have evolved. One relatively simple part of NAFTA will be to borrow provisions from other recent agreements, covering issues such as state-owned enterprises, e-commerce, labor, and the environment. 

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There are lots of rumors these days about whether the Trump administration is going to withdraw from NAFTA, whether the Canadians think the Trump administration is going to withdraw from NAFTA, and (in a tweet that I remember but can’t seem to dig up) what the Trump administration thinks about the Canadians thinking that the Trump administration is going to withdraw from NAFTA. I don’t know what to make of any of that. I’m just going to focus on the substance of Round 6, after which we may have a better sense of what is actually possible and likely here.