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Renegotiating NAFTA

The sixth round of renegotiations of the North American Free Trade Agreement (NAFTA) ended on 29 January 2018. The round included negotiations by 30 technical groups. An agreement has been reached on anti-corruption-related issues and information technology. There were also negotiations on sanitary and phytosanitary measures, telecommunications, and technical barriers to trade. Negotiations continue on the most difficult negotiation points, particularly rules of origin, and the next round of renegotiations has been schedule for 26 February–6 March in Mexico City. The probability of the renegotiations extending through 2018 and beyond is high.

  • The United States faces a challenging series of complicated accountability problems and changing priorities. Although legally unclear, the chief US negotiator, United States Trade Representative Robert Lighthizer, will probably need to gain approval from the legislative branch for any major amendments to the trade agreement. Although some items in the negotiations will enjoy broad congressional support, such as bolstering US firms' market access and building a modern framework for the digital economy, others will prove far more contentious, such as surrendering "Buy American" clauses for local procurement. US President Donald Trump's administration seems split on how hard to press its trade partners, with the president, Lighthizer, and National Trade Council Director Peter Navarro insisting on significant revisions on dispute settlement mechanisms and tariff exemptions for Canada and Mexico. Conversely, Secretary of State Rex Tillerson, Economic Adviser Gary Cohn, and Agriculture Secretary Sonny Perdue appear likely to favour only modest regulatory revisions to the existing agreement to avoid damaging the US equity markets or overall US economic growth.
  • Canada aims to save the agreement, while diversifying its trade partners. NAFTA has been a success for Canada, garnering the country an extra 2.5% GDP growth per year since its launch. Canada would prefer to update the agreement to account for new sectors such as e-commerce; Canada also aims to protect its manufacturing sector against increasing demands for US content, particularly in automotives. On 20 December 2017, Canada launched a complaint at the World Trade Organization against US trade practices; although the government was probably aware that this would delay negotiations, it was probably viewed as necessary. Canada probably hopes to secure a bilateral trade agreement in the event of NAFTA's collapse, which IHS Markit assesses is highly likely to be agreed. Canada reduced the pressure it faces from a deterioration of trade with the US by agreeing on 23 January to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), along with Mexico and 10 other countries, likely resulting in a stronger negotiating position regarding the US.
  • With 80% of Mexico's exports destined to the United States, the outcome of renegotiation will have implications across all sectors of its economy. The sectors most affected by the renegotiation will be automotive, manufacturing, and agriculture, and the government is currently aiming to diversify export partners should the United States decide to withdraw from NAFTA. Mexico is party to free trade agreements that comprise 45 countries and 31 bilateral investment treaties, which should help the country diversify trade partners. However, a US withdrawal will nonetheless affect economic growth and investment because it would take time to build new trade relationships worldwide. The points of contention for Mexico have been rules of origin, labour regulations, as well as Chapter 19 (dispute settlement), and its government has said that it would leave the renegotiation table if the United States decides to initiate its withdrawal process as a renegotiation strategy.
  • Tracing issues surrounding rules of origin in the automotive sector are a key area of dispute between the parties. Parts not specifically identified in the 1994 NAFTA document are not counted as being either of North American origin or imported and consequently are not considered in country of origin criteria. With increased use of electronics including touchscreens and supporting hardware in vehicles, the fact that these parts are not counted can have a substantial effect on the balance between imported and domestically produced parts. Mexico has opposed the US demand to increase rules-of-origin requirements from the permitted 62.5% to 80.0%, of which 50.0% would need to be from the United States.

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