NAFTA: Negotiating without Naivety

When Canada joined NAFTA - a decision welcomed by Mexico - no one anticipated that this would represent a valuable resource in case of a renegotiation. Today, this is very clear.  

After the United States published its Summary of Objectives for the NAFTA Renegotiation (SofO), comments have escalated both in Mexico and in Canada. The coincidences and disagreements are significant. 

First, there is a consensus that the document published by the United States is not as contentious as it was previously anticipated to be. It is evident that Donald Trump toned down his position towards NAFTA between January and August of this year. His position has shifted from pulling out of NAFTA, and the World Trade Organization (WTO), towards renegotiating and modernizing NAFTA. It is yet to be seen if this position is reversed through a tweet.

Second, Mexico has emphasized, more so than Canada, that the United States’ intention to reduce its trade deficit with its NAFTA partners is nonsense. Deficits are only modified by macroeconomic adjustments, which reduces the saving-investment imbalance and/or the fiscal deficit. Mexico needs to keep explaining and insisting on this matter. Hopefully, Canada will also join the conversation.

Third, it is beneficial that the summary of objectives does not suggest to renegotiate “access to markets,” which refers to the products and services included in the agreement, as well as the tariffs and quotas that applied. Nevertheless, the agreement includes various “objectives” that apparently do not affect specific products. In reality, they do. This is the case for Canadian dairy and wood products and for Mexican sugar, potato, and meat products, as stated in Mariano Ruiz Funes’ most recent article. It is yet unclear how U.S. objectives for the NAFTA renegotiation will affect specific products and services, considering how these “objectives” are written in the document. This clarity will come to light eventually, and one can expect resistance/controversy to arise.  Besides being a trade agreement, NAFTA is also an agreement on investment regimes, based on the principle of “national treatment.” For this reason, investors have gained confidence, and investment flows have increased between the three countries. According to the U.S. SofO, some “sensible” sectors that were reserved by Canada and Mexico in the original treaty will now be opened to foreign investment coming from the United States. This will be the case for Canada in the cultural industry, telecommunications, air transport, fishing, and retail banking; while for Mexico, in the energy, telecommunications, and air transport sectors.

Fourth, some argue that Canada and Mexico had already accepted some of the terms that are included in the Summary of Objectives during the Trans-Pacific Partnership (TPP) negotiations. While this might be true, one should not argue nor expect that Mexico will accept the same terms in the absence of concessions made by other parties during TPP negotiations. These terms will be subject to a detailed “give and take” process.

Fifth, it is critical that the Summary of Objectives includes a homologation on labor rights and its compliance given that Mexico has abundant unskilled labor, as well as lower minimum wages. Strict compliance of labor provisions is desirable for everyone. Yet, it is likely that our NAFTA partners will use shortcomings to argue non-compliance and, as a consequence, turn to trade retaliations (an underhanded protectionist instrument). A similar scenario will be faced with the inclusion of the environment to NAFTA. 

Sixth, the most provocative objective listed in the Summary of Objectives is “eliminating Chapter 19” - the mechanism that allows parties to resort to international arbitration for dispute settlement. If Mexico and Canada concede, both countries will have to dispute disagreements in U.S. courts. This is such an unquestionable matter that even the Canadian Prime Minister said “it is absolutely essential that a revised North American Free Trade Agreement contains a dispute-resolution panel.” This matter has caused controversy, even before negotiations begin. 

There are other relevant objectives listed, such as the objective about corruption and the elimination of the global safeguard exclusion that limits the ability of the United States to impose import restrictions on Canada and Mexico. These objectives should be analyzed without naivety.