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US House Speaker Paul Ryan said on 9 May that US legislators
would need to receive the final renegotiated North American Free
Trade Agreement by 17 May if the President Donald Trump's
administration wanted fast-track ratification in 2018.
Only six of 30 negotiating chapters have been officially
completed, and an agreement by 15 May looks difficult and would
only be possible if the United States cedes on many of its demands,
including rules of origin but also the modification of the North
American Free Trade Agreement's dispute settlement mechanism.
Ratification under the current Republican-dominated Congress
would only be possible in the December 2018 lame-duck period,
before a new Congress takes over (with a different balance of
power) in 2019.
The political calendar in Mexico would force President Enrique
Peña Nieto to call for an extraordinary period of sessions in
August or September if he wants ratification during his term, but a
new president will take office on 1 December and his position on
any renegotiated deal would be important.
Canada, Mexico, and the United States have been renegotiating
the North American Free Trade Agreement (NAFTA) since August 2017,
but only six out of 30 trade-related chapters have officially been
agreed. The rules of origin issue, relating specifically to local
content demands in the auto industry, is among the most contentious
areas of negotiation, together with US-proposed modification to the
dispute settlement mechanism and the incorporation of a sunset
clause.
Under the current US Trade Promotion Authority, the US Congress
would be able to ratify the agreement without amendments, but
Congress needs to be notified 90 days prior to the US president
signing it and needs to wait until the US International Trade
Commission produces an economic impact report "no later than 105
calendar days after the agreement is signed" for Congress to be
able to discuss the renegotiated deal. Under such circumstances and
with US mid-term elections taking place in November, the
possibility of ratification under the current Republican-dominated
Congress would be in the December 2018 lame-duck period prior to
the start of the new Congress in 2019, which might have a different
balance of power.
Outlook and implications
Even if the current differences on rules of origin are resolved
(media said on 10 May that the US had rejected Mexico's latest
counterproposal - 70% local content - on this subject) agreement
looks unlikely to be reached by 17 May unless the US decides to
cede on its demands relating to the modification of the dispute
settlement mechanism (the Mexican government is unlikely to accept
to resolve trade-related disputes in US courts rather than through
an arbitration process) to ensure ratification with a
Republican-dominated Congress.
In the case of Mexico, ratification of a renegotiated NAFTA
would only be needed in the Senate, which is currently in recess.
With a Mexican presidential election scheduled for 1 July,
incumbent President Enrique Peña Nieto will likely struggle to
successfully arrange an extraordinary session amid the ongoing
political campaign. Therefore, the current Mexican administration
will have two options to ratify the agreement before a new
president takes over on 1 December. The first one would imply
calling for an extraordinary period of sessions in August, under
the current balance of power in the Senate where the ruling
Institutional Revolutionary Party (Partido Revolucionario
Institucional: PRI) and its allies have a 48% representation.
Peña Nieto's second option would entail attempting to ratify
the renegotiated deal with a new Senate, where the balance of power
will shift as its members will also be elected on 1 July, but that
starts legislating on 1 September.
In any of these scenarios, the position of the next Mexican
president to be elected will be crucial to ensure the treaty's
ratification. Front-running presidential candidate Andrés
Manuel Lopez Obrador of the National Regeneration Movement
(Movimiento Regeneración Nacional: MORENA) has supported the
continuation of NAFTA in the past but warned against a
rushed-renegotiation and will likely want to carefully study any
final deal. However, Ricardo Anaya, second in the polls and
belonging to the Citizen Front for Mexico (Frente Ciudadano por
México: FCM) coalition, is more likely to support the
ratification of any agreement.
In the case of Canada, the ratification process is very
straightforward, and there is strong political consensus in support
of NAFTA. Ratification takes place at the cabinet level, which is
assured, as is the House's passage of any necessary implementation
legislation at the federal level. Although provincial legislatures
are responsible for the introduction of any necessary
implementation legislation in areas under their jurisdiction, it is
highly likely that the provinces would quickly pass the required
legislation. Canadian legislators are likely to be flexible with
their timeline for ratification, with the federal and provincial
legislatures likely to be recalled to pass any required legislation
if necessary to ensure the agreement's successful conclusion.
Agreement between the three countries by 15 May would be the
most beneficial scenario for the economic and trade stability of
the three countries, but particularly to Mexico as its dependency
on the US (the market for 80% of its exports) is large and an
agreement would remove the economic uncertainty (which has weakened
the Mexican peso on several occasions over the past year) generated
by the withdrawal threats made by the US. The worst-case scenario
for Mexico would be a termination of the agreement. We expect the
Mexican economy to grow 1.9% in 2018 and 2% in 2019 but under such
worst-case scenario Mexican real GDP growth would be reduced by 0.9
percentage point in 2018 and 2.3 percentage points in 2019.
Consequently, Mexico would enter recession. In the first two years
after the end of NAFTA the Mexican economy would lose 1.2 million
jobs while inflation would surpass 6% and the unemployment rate
would increase to 7%.