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On NAFTA, America, Canada and Mexico are miles apart

THESE are troubling times for Roberto Santana Flores, a Mexican maker of charro shirts, a modern take on the Mexican cowboy aesthetic. He recalls life before the North American Free-Trade Agreement (NAFTA), a trade deal linking Mexico with America and Canada. He remembers his shirts incurred a whopping 37.5% tariff if exported to America. Now they cross the border duty-free. But his dream of expanding his factory and his American customer base is under threat. He scours the newspapers daily for news of the NAFTA negotiations. They tell of conflict. Some even warn the deal may collapse. Since it covers trade worth more than $1trn a year, that is alarming for many more than Mr Flores.

On October 17th trade representatives of the three countries gathered to mark the end of the fourth round of talks. A collapse does not seem imminent. Robert Lighthizer, the United States Trade Representative (pictured, centre), denied that abandoning the deal was even being discussed, and announced an extension of negotiations into the first quarter of 2018. But he also played down the damage that would be done if no agreement is reached. And Chrystia Freeland, the Canadian foreign-affairs minister, said that in a “no-fuss Canadian way” she was preparing for “the worst possible outcome”.

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Some parts of the revamp are progressing nicely. A trilateral statement boasted of progress on the rules covering competition policy, customs, digital trade and regulatory practices. In others, the evident tensions were always to be expected. Mr Lighthizer expressed dismay that his counterparts had rejected some text (on telecommunications, anti-corruption and digital trade) agreed to in the Trans-Pacific Partnership—a 12-country deal from which President Donald Trump withdrew America in January. But Mr Lighthizer knows that a three-party deal differs from one granting extra access to Japan. For her part, Ms Freeland was incredulous at the stinginess of America’s offer on government procurement. It meant that Bahraini businesses would have more access than Mexican and Canadian ones.

These are not the only American proposals to cross the others’ red lines. Rules that would make it easier to impose anti-dumping duties to protect seasonal American agricultural products, for example, have provoked outrage. Demands to phase out Canada’s system of supply management for dairy, poultry and eggs are politically explosive. No big political party in Canada dares take on the well-organised dairy lobby. America’s proposal to scrap NAFTA’s Chapter 19, which provides a way to resolve disputes over anti-dumping and countervailing duties, recalls 1987, when the issue provoked a Canadian walkout from trade talks.

All this is acrimonious, but within the normal bounds of trade negotiations. It is a final set of American demands that is most contentious. Ms Freeland talked of “unconventional” proposals that made her team’s work “much more challenging”. John Murphy of the United States Chamber of Commerce, a business lobby, was blunter, describing them as “so extreme that they allow no room for negotiation”.

The first is a five-year “sunset” clause, forcing a systematic regular review of the deal. Presumably the American administration believes this would deter its trading partners from bad behaviour. More probably, it would chill cross-border investment and trade. Nuno Limão, a professor of economics at the University of Maryland, has found that a hefty chunk of the trade-stimulating impact of deals comes from increased predictability. A sunset clause embedding uncertainty would do the reverse. On October 17th Mr Lighthizer, who does not see his job as promoting investment in Mexico, seemed unmoved by such concerns, asking why businesses did not just factor the risk into their decision-making.

Making America grate again

The second deal-breaker covers the car industry, responsible for more than a quarter of American imports from Mexico and Canada and, in Mexico’s case, all of the trade deficit in goods. Mr Trump wants to bring American jobs back from its neighbours, and eliminate the bilateral trade deficit. At present, at least 62.5% of a vehicle must be from within NAFTA members to qualify for tariff-free treatment. Mr Lighthizer wants that raised to 85%, with an extra requirement of 50% American content.

Those involved in the industry squeal at the disruption such changes would inflict on deeply integrated supply chains. Official statistics do not capture the likely fallout. In a recent article Wilbur Ross, America’s commerce secretary, who has reportedly been pushing for tighter rules, complained that only 16% of the value embedded in Mexican exports to America is American. But a new paper by Alonso de Gortari of Harvard University finds that once the way supply chains are adapted for the export market is taken into account, the true value embedded in Mexican vehicle exports to America is 38%.

Rather than bring jobs back to America, the proposed content rules would in the short term force car manufacturers to bypass the deal altogether, instead incurring the 2.5% tariff on cars imported into America. That would raise prices for American consumers and make North American producers less competitive.

So unorthodox is the latest batch of demands, introduced only during the latest round of talks, that some question whether the Trump administration is negotiating in good faith. Mr Lighthizer claims to be trying to please only his boss, Mr Trump. But Congress must pass the final deal. This is topsy-turvy. Normally, in America’s trade talks, the president plays nice cop to Congress’s tough guy. This time, roles are reversed. Members of Congress are examining whether it has the legal power to block an attempt to withdraw from NAFTA.

After four rounds and 22 days of negotiations squeezed into just over two months, there is now a month until the next round. In theory this should give each side time to think of “creative ways” to narrow their differences. So far the rounds have been packed so tightly together that there has not been much chance to update positions between rounds, nor to share texts in advance. But at this stage, it seems unlikely that any deal that will please the Mexicans, the Canadians, Congress and Mr Trump exists. Mr Flores, the cowboy-shirt exporter, has begun to think beyond NAFTA. After all, “there are other countries to sell to.”

Source: economist
On NAFTA, America, Canada and Mexico are miles apart

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