Written by Jaime Zucker
Following informal talks in Washington at the beginning of April, NAFTA negotiators missed another deadline when they were unable to resolve key issues in the renegotiation in time for the Summit of the Americas. Missing deadlines due to deadlock has been a recurring theme of the renegotiation process, which began back in August 2017. Since calling NAFTA the “worst trade deal ever made,” President Donald Trump has pursued an aggressive negotiation strategy, which appears to tip the balance of the treaty in favor of the U.S., but in reality his efforts are calibrated to kill the deal altogether. Although negotiators are optimistic that a deal could be reached in early May, unless the U.S. delegation backs off the auto manufacturing and sunset clause provisions, the “poison pills,” a workable renegotiated treaty is simply an impossibility.
The renegotiation took an unexpectedly hopeful turn on March 20th when the U.S. government dropped a controversial origination provision. The rule would have required vehicles that are manufactured in Mexico or Canada for export to the U.S. contain at least 50% content originating in the U.S. Not only was this demand unusual for a free trade agreement, which on principle do not explicitly favor one country over another, but it was also practically impossible to carry out as the U.S. lacks the materials to source that much auto manufacturing content. Including the provision in the treaty would have essentially eliminated the tariff protections on automobiles, which can cross the U.S.–Mexico border as many as eight times during production.
Dropping the 50% origination demand was a step forward in the renegotiation, but the U.S. is still insisting on an increase in the requirement for content produced in the NAFTA territories from 62.5% to 85%, and is pushing a new plan which would “ensure that a certain percentage of work in the [auto] industry is sourced from ‘high salary’ areas.” The new provision is an attempt to shift manufacturing work from Mexico, the seventh largest auto manufacturer in the world, to the U.S.
The second controversial provision proposed by the U.S. is a sunset clause which would kill NAFTA every five years, requiring a renegotiation if the parties choose to extend the treaty. The strongest objection to the sunset clause comes from Mexico, a hub of foreign direct investment, which fears that a treaty that risks dissolution every five years will make investors reluctant to make long-term plans in the region.
Although Mexico and Canada are an unusual voting bloc, both countries have remained firm in their refusal to accept a treaty which includes either the original auto manufacturing proposal or the sunset clause. The two provisions were characterized by U.S. Chamber of Commerce President Thomas Donohue as “poison pill proposals . . . that could doom the entire deal.” They are provisions which Canada and Mexico simply cannot justify to their ratifying bodies, which means the three nations will not approve a version of the treaty that incorporates these provisions. While it may look like the U.S. is participating in the renegotiation to save the treaty, by characterizing these provisions as deal-breakers, the U.S. has created a situation in which the only feasible outcome is NAFTA’s dissolution. Unless the U.S. delegation continues to soften its strategy by dropping or modifying its position on the auto manufacturing content and the sunset clause, NAFTA will cease to exist.