Following the United States’ call for a renegotiation of the North American Free Trade Agreement (NAFTA), negotiations among the US, Canada, and Mexico started in August this year, with the fifth round of talks scheduled to commence today.

Evaluation of Key Discussion Topics

While progress has been made during the negotiations in areas such as competition, digital trade, and regulatory practices, there appear to be a several divisive topics that are hindering the advance of talks. Some of these areas are discussed in detail below.

Automotive Rules of Origin: As per present trade conditions, 62.5% of the value of autos, light trucks, and engines and transmissions, and 60% of the value of other vehicles and parts must originate within NAFTA member countries to be exempt from tariffs 1 . Reports reveal that the US had proposed raising North American content share in autos, trucks, and large engines from 62.5% to 85% over a period of time, with US-made products constituting 50% of the products used in vehicles (within a year from deal signing) and steel, aluminum, copper, electronics, plastics, and other parts sourced from within NAFTA member countries. Higher North American content share and limited sourcing of raw materials from abroad should help drive greater production within North America. However, supply chains would be disrupted and the competitiveness of the North American automotive industry stands to be affected, with manufacturers restrained from sourcing raw materials and parts at more competitive prices from abroad. A US-specific content requirement would have similar effects. These measures could also possibly cause manufacturers to relocate to other locations or carry out trade without NAFTA benefits (thereby being subject to import duties). With automotive rules of origin appearing to be a contentious issue during negotiations, it is likely that Canada and Mexico will seek modifications to the US proposals.

Sunset Clause: The US is reported to have proposed a sunset clause by which NAFTA would expire every five years in the absence of confirmation by member countries to continue with the trade agreement. Such a clause would sow a lot of uncertainty regarding future trade and investment prospects for firms, leading to dented business confidence and limited industry growth. With Canada and Mexico appearing to be opposed to the clause, it is possible that the countries would advocate to extend the time period tied to the clause or do away with the proposed clause.

Dispute Resolution: The US has called for the abandonment of Chapter 19 of NAFTA under which a binational panel hears complaints with regard to unfair anti-dumping and countervailing duties 2 and eventually issues binding decisions. The US has lost several such cases, which has hindered it from imposing anti-subsidy and countervailing duties against Canadian and Mexican firms. Removal of Chapter 19 would move such cases to US courts, which could make the appeal process more lengthy and costly, something that smaller businesses might not be able to afford. Canada stands opposed to the removal of Chapter 19. It is therefore possible that as opposed to complete abandonment, there could be some reforms in this regard.

Extension of Talks

While the talks were initially expected to be concluded by the end of 2017, member countries have agreed to extend renegotiation talks into the first quarter of 2018. However, should there be further delay, efforts to ratify a reformed trade deal stand to be complicated by US mid-term elections and Mexican general elections that are scheduled to take place in the second half of 2018. Sustained uncertainty regarding the future of NAFTA will also force businesses to delay strategic trade and investment related decisions, which could hamper industry and economic growth across the member countries.

What Happens if Talks Collapse?

The NAFTA negotiation talks could collapse in the light of several major divisive points as well as repeated indications by the US that withdrawal from NAFTA remains a possibility. Should the US withdraw from NAFTA, the trade deal would continue to remain in force for the remaining parties—Mexico and Canada. This means Mexico-Canada trade would continue to enjoy NAFTA advantages, whereas most favored nation (MFN) tariffs would become applicable on US trade with Mexico and Canada. Consequently, with the loss of free trade benefits, the North American industry would lose its competitiveness, possibly forcing companies to pursue investments abroad; consumers would feel the pinch of higher prices, the volume of trade and investment between the three countries would decline, and economic growth would suffer across the nations.

Clearly, there is a lot of uncertainty concerning North America’s trade and industry prospects. While negotiations over the next few months will prove to be critical in the shaping of a revised, updated NAFTA, potential US withdrawal would have far-reaching adverse implications for North American trade and industry.

[[1] Congressional Research Service
[2] Dumping occurs when foreign manufacturers sell goods in the export location at lesser than fair prices, with countervailing occurring when foreign governments provides subsidies and tax benefits by which the price of exported goods undercuts that of goods produced in the export destination. ]

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