Pivotal time for NAFTA and auto industry

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Turbulent times ahead for NAFTA negotiators as bluster and rhetoric increase

Beginning August 16th the federal government’s trade negotiators will be sitting down in with their American and Mexican counterparts in Washington for five days to begin the first, of what we have been advised, will be seven rounds of trade negotiations leading up to the late December time period.   

By late December or early January 2018 we will supposedly have a re-negotiated NAFTA either finalized or largely finalized, according to officials.  

One might rightly speculate how much ambition can actually be contemplated for NAFTA 2.0 over such a constrained time period?

While negotiations may possibly be protracted throughout 2018 and into early 2019, the odds seem likely that things will be wrapped up by the end of the year or early January for a couple of key reasons.

The first reason for an early conclusion to the NAFTA negotiations is the Mexican General Election which will take place on July 1st next year and there is currently no guarantee that Enrique Peña Nieto will retain the presidency with a possible successor named Andrés Manuel López Obrador from the left-wing PRD party ascending to the presidency.   

Left-wingers and trade negotiations don’t normally mix very well together so this does not bode well for NAFTA negotiations.    

The second reason for an early conclusion of the negotiations is the U.S. mid-term elections next November which will suck up a lot of the political time and attention starting relatively early into 2018.    

For these two reasons, it makes sense that the negotiators from all three countries would work on an expedited basis to bring the negotiations to a mutually satisfactory conclusion — if there can be such a thing.

In some ways, President Trump’s vow to rip up or substantially renegotiate NAFTA during his election campaign has now transformed into a situation where the dog has finally caught the bus and is left wondering “I didn’t expect this to happen, now what do I do?.” Former President Barack Obama had also pledged to renegotiate the NAFTA as part of his election bid in 2008.   

However, it would seem that once in power and having grasped the overall benefits of the agreement for the United States, he subsequently stepped down from that that pledge.  

It is also interesting to recall that presidential candidate Hillary Clinton also signalled her intent to revisit NAFTA despite the fact that it was her husband’s administration the negotiated the deal that was then implemented by the Bush Administration. 

It will remain to be seen what other negotiating priorities for Canada are highlighted in advance of the upcoming first round of negotiations — if any.

So while there had been lots of talk about renegotiating NAFTA the dog has never caught that bus — until now.

On July 17th the United States Trade Representative (USTR), Robert Lighthizer announced the Trump Administration’s priorities for the NAFTA negotiations. Although from a Canadian perspective the list could have been a lot worse, there were still some things on the list that have already been identified as “show stoppers” for the Canadian government.    

For instance, the Prime Minister has already drawn a line in the sand with respect to the desire of the U.S. to eliminate Chapter 19 of the NAFTA which related to the Dispute Settlement Mechanism that is to be deployed when disputes between the NAFTA parties cannot be reconciled.   

This was such an important component of the original Canada/U.S. FTA that deal almost did not come to fruition as the Americans were reluctant to accept this mechanism which they interpreted as the subjugation of U.S. law.   

Once in the Canada/US FTA, the provisions were then rolled into the tri-lateral NAFTA.

The dispute settlement mechanism appears to be the most significant item from Lighthizer’s list of priorities upon which the government has staked out a clear position in advance of the upcoming first round of negotiations.

It will remain to be seen what other negotiating priorities for Canada are highlighted in advance of the upcoming first round of negotiations — if any.

While there are a few other sectors including energy and agriculture that are viewed as the catalyst sectors for the renegotiation of NAFTA, it is arguable that the automotive industry has become the poster child for the supporters of a renegotiated NAFTA.   

The auto industry’s status in this regard is due to the perception that Mexico is essentially responsible for the hollowing out of the mid-west auto manufacturing base in the United States while also being responsible for the loss of assembly facilities in Southern Ontario as well.

Certainly Mexico has attracted a significant amount of automotive investment over the last 23 years from international companies and Detroit-based automakers alike.   

In the case of the fifteen members of the trade association I represent, all but three have production facilities in the NAFTA region.   

These objectives include the principle of “do no harm” or in other words let’s not make the industry worse off by any changes negotiated.

That number will shrink to two next year when Volvo establishes its $500 million plant in Ridgeville, SC. It’s not reasonable to disparagingly refer to these companies as “importers” when one considers that more than 60% of our members sales in Canada in 2016 were built in one of the three NAFTA countries.

Surely this is a good thing in many ways though because production localized anywhere in North America means substantial opportunities for parts suppliers — which tend to be in close geographic proximity to assembly plants.

To buttress this assertion, on a more general basis, the U.S. National Bureau of Economic Research has noted that each dollar of goods or services the U.S. imports from Canada contains 25¢ of U.S. content and, likewise every dollar of goods or services the U.S. imports from Mexico contains 40¢ of U.S. content, so it is not like production outside of the United States provides no value added to the U.S. economy.

There is likely a high degree of agreement amongst those in the automotive industry of all three countries around what the objectives for a new NAFTA should be with respect to the industry.   

These objectives include the principle of “do no harm” or in other words let’s not make the industry worse off by any changes negotiated.

Another principle I think all in the industry can rally around is keeping the negotiations operational on a tri-lateral basis. It is important that these negotiations be pursued collectively as opposed to two bi-lateral discussions with the United States. In bi-lateral context, Canada and Mexico risk being played off against one another by the United States.   

It would seem that the only way for any real progress to be made with respect to a re-negotiated NAFTA on such a tight time line would be to include progressive provisions from other trade agreements — such as the Trans Pacific Partnership (TPP) agreement that Canada, the U.S., and Mexico were already party to before Trump sounded the death knell for that trade agreement.

I think that there is also unanimity across automotive producers and their associations — regardless of NAFTA country — that there should be no change in the Rules of Origin or the Regional Value Content, which are the highest of any modern trade agreement in the automotive sector.    

This will be challenging however given that the President has indicated not only a desire to raise the content level but also to potentially build in some U.S. specific origin provisions.

The next five or six months promise to be a very interesting and challenging time as we move directly into the fire of the trade negotiations from the frying pan of Trumpian taunts to rip up what has been arguably a very beneficial trade agreement.

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