NAFTA talks off to tense start, revealing signs of disagreement

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Trade representatives from the US, Canada and Mexico are renegotiating the 23-year-old North American Free Trade Agreement (NAFTA) in Washington.

The talks that began Wednesday are the first of several scheduled rounds between now and the end of the year, when the three nations hope to conclude a deal.

The US — the trio's most vocal advocate for NAFTA reform under President Donald Trump — formally signaled in May that it planned to seek a new NAFTA, fulfilling one of Trump's campaign promises and throwing the future of the pact into uncertainty.

Mexican and Canadian representatives framed their desires around "modernizing" NAFTA to reflect more of today's global economy, including guidelines for e-commerce, which isn't included in the old deal.

A rocky start

At the start of the talks, US trade representative Robert Lighthizer drew a hard line for retooling the agreement.

Robert Lighthizer, US trade representative, speaks during the first round of North American Free Trade Agreement (NAFTA) renegotiation in Washington, D.C., US on August 16, 2017. /VCG Photo

"I want to be clear, [President Donald Trump] is not interested in a mere tweaking of a few provisions and a couple of updated chapters," Lighthizer said. "NAFTA has fundamentally failed many, many Americans and needs major improvement."

Lighthizer put Mexico and Canada on notice that the US would use its clout as their biggest export customer to wring concessions.

US-Canada-Mexico trade has quadrupled since NAFTA took effect in 1994, surpassing 1 trillion US dollars in 2015.

"We need to assure that the huge deficits do not continue, and we have balance and reciprocity," said Lighthizer.

In her opening statement, Canadian Foreign Minister Chrystia Freeland took a swipe at the US fixation on cutting its trade deficits, saying "Canada does not view trade surpluses or deficits as a primary measure of whether a trading relationship works.

Mexico has been even more pointed in resisting the assertion that there is a problem.

Economy minister Ildefonso Guajardo Villarreal told a Mexican Senate commission last week that he was “delighted to analyze the situation that we call ‘trade rebalancing’ if and when we manage to improve that through expanding trade, not restricting it.”

Ildefonso Guajardo Villarreal, secretary of economy for Mexico, listens during the first round of North American Free Trade Agreement (NAFTA) renegotiation in Washington, D.C., US on August 16, 2017. /VCG Photo

Many economists agree that the focus on bilateral trade is misplaced. A nation may run a deficit with one trading partner and a surplus with another, and what mattered was the totality.

Lighthizer also signaled problems, such as rules of origin, lack of labor provisions, currency manipulation and market-distorting practices, and a fight over NAFTA's "Chapter 19" trade dispute settlement system for changes that would allow more anti-dumping duties against Canada and Mexico.

If the US insisted on scrapping the trade dispute settlement system that requires the use of binational panels, her country could walk away, suggested Freeland earlier this week.

Canadian Foreign Minister Chrystia Freeland speaks at a news conference about the start of NAFTA renegotiation at the Canadian Embassy in Washington, US on August 16, 2017. /VCG Photo

Automotive sector dilemma

The rules of origin regulations stipulate how much of a final product may include non-NAFTA country components to qualify for NAFTA tariff benefits.

Lighthizer put special emphasis "on autos and auto parts," saying that a new agreement "must require higher NAFTA content, and substantial US content" for products to qualify. A new accord must include a product's country of origin is "verified, not deemed," he said.

Under NAFTA's current "rules of origin," a common automobile is exempt from cross-border tariffs if 62.5 percent of its value stems from content made in the three member countries.

Raising that percentage — or carving out some sort of newly mandated threshold for US-made content — could severely restrict trade between NAFTA and non-NAFTA countries alike.

"One of the more complex cases will be that of the automotive sector, one of the most successful in Mexico, but also one that Mr. Trump has highlighted as particularly problematic for his country, even though US inputs account for around 40 percent of the value of the automotive products that Mexico exports to the US," a research note published last month by The Economist Intelligence Unit said.

"To compound the challenges, some players in the industry do not want to see North American content increase as this would affect their flexibility to import cheap inputs from Asia."

The United Automobile Workers union has long sought such a change, but carmakers are wary of high cost.

Both Canada and Mexico said Wednesday that they opposed specific standards for the share of car parts coming from any of the three nations.

A hollow threat to retract from NAFTA

VCG Photo

In light of the differences that the trio obviously has, is it possible that the US will withdraw from NAFTA just as Trump has repeated threatened during his campaign trail if other nations are unwilling to renegotiate to terms he likes?

Well, Trump's threat to unilaterally back out of NAFTA may be a hollow one for a simple reason: the US Constitution.

The Constitution plainly assigns power over the policy areas covered by trade agreements – foreign trade and tariffs (taxes levied on imported goods) – to Congress, not the president.

The president may have the authority to withdraw from international agreements like NAFTA without congressional consent. But the president cannot constitutionally ignore or cancel the domestic laws passed by Congress simply by withdrawing from an international commitment.

In other words, even if the United States leaves NAFTA, the president will still be bound to implement the agreement’s rules on the terms dictated by Congress until Congress says otherwise.

Democrats, who have long sought changes to NAFTA, share many of Trump's stated goals, but his political problems could complicate any alliance. Therefore, there is little if any congressional support for the administration’s threat to withdraw from the trade agreement.

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