The U.S. Puts Its Trade Policy Into Practice
The United States will continue putting its trade policies into action during the fourth quarter. Negotiations to update the North American Free Trade Agreement will move into full swing as the year winds down. But considering the challenges entailed in harmonizing the three signatory countries' priorities, the negotiations probably won't wrap up this quarter as planned and likely will drag into next year. That means the revised NAFTA won't take effect until later in 2018 at the earliest, since the U.S., Canadian and Mexican legislatures will each need to approve the new agreement.
As the talks progress, they will reveal the protectionism that still underpins U.S. President Donald Trump's trade strategy despite the White House's efforts to distance itself from the more defensive policies he espoused on the campaign trail. Washington will focus on retooling the free trade deal to reduce the United States' bilateral trade deficits — particularly the $66 billion disparity in its dealings with Mexico last year. To that end, the U.S. administration will push for more stringent rules-of-origin requirements, as well as domestic content requirements for the U.S. steel and automotive sectors. The latter policy could become a sticking point. Content requirements in multilateral deals, after all, typically apply to content produced in the bloc as a whole, rather than in a single signatory country. Ottawa and Mexico City will also face pressure from Washington to increase U.S. access to their domestic markets and, in Mexico's case, to improve wages, labor standards and environmental standards.
At the same time, Mexico and Canada have their own priorities for the negotiations. Canada, for example, wants to keep the Chapter 19 dispute settlement mechanism, though the United States already has said it wants to do away with the institution. The chapter prescribes binational panels to rule on anti-dumping and countervailing duties cases, and without it, disputes would go through member states' domestic courts to be adjudicated by judges who don't necessarily specialize in foreign trade. Ottawa would rather avoid that scenario. In addition, it will press the United States to allow for freer movement of labor among NAFTA members, a new chapter on labor standards and enhanced access to government procurement. By advocating these changes, Canada hopes to make the most of the renegotiations. Mexico, on the other hand, would sooner leave the agreement alone. Its main objective for the renegotiations is to preserve its extensive access to the U.S. market. But to do that, Mexico City will have to resist Washington's efforts to make its exports less competitive under the new agreement and oppose U.S. attempts to erect additional trade barriers.
NAFTA isn't the only trade deal under the United States' microscope. The White House also has targeted the United States-Korea Free Trade Agreement, or KORUS, for revisions. But because the Trade Promotion Authority Act requires Washington to give Congress 90 days' notice before entering official negotiations with Seoul, talks to amend the deal won't begin this quarter.
Beyond trade deals, the United States will continue to advance its economic interests abroad with investigations into China's trade practices. The inquiry into China's technology transfer requirements for U.S. companies investing in the country will continue to be the centerpiece of the investigations. The Trump administration is looking into whether Beijing's policies on intellectual property, including stipulations that U.S. firms must share technology with China in exchange for market access there, violate World Trade Organization (WTO) agreements or unfairly discriminate against American businesses. During the fourth quarter, the United States will focus on gathering facts to build its case against China, though it probably won't pursue action against the country — either unilaterally or through the WTO — until next year. The path Washington chooses against Beijing will depend in part on what the investigation uncovers, but in the past, White House officials have argued in favor of bypassing the WTO when challenging China's trade practices.
Default Looms Large in Venezuela
In Venezuela, the government has more pressing concerns. Having temporarily gained the upper hand over the dissidents in its ranks, the ruling United Socialist Party of Venezuela (PSUV) will focus in the fourth quarter on ensuring the current administration's longer-term survival. It will keep ruling by decree through the National Constituent Assembly (ANC), a body designed to skirt the opposition-controlled congress and cement the PSUV's absolute power over the country. Nevertheless, as inflation continues to skyrocket and dissatisfaction grows among the lower ranks of the armed forces, the ruling party will face its share of challenges this quarter.
The most immediate threat to the administration will be the possibility of financial default by state-owned oil company Petroleos de Venezuela (PDVSA) or the central government. If PDVSA defaults on its foreign debts, Venezuela's already declining oil production would plummet within months as oil services companies and joint venture partners pull out. The drop in oil production, in turn, would translate into reduced food imports and rising inflation, spurring greater social unrest and raising the risk of a military rebellion.
Considering that the government has less than $2 billion in its liquid reserves — and $3.6 billion in loan repayments due mostly in October and November — Caracas may well default if it doesn't secure more funding. And since the United States has virtually cut off Venezuela's government from its financial system, Caracas would have to turn elsewhere for financial help. It could try to work out a one-off agreement, for example by arranging a bond buyback with its Chinese creditors, restructuring or delaying its repayments to other creditors, or cobbling together additional purchase agreements with other oil companies. Even if it avoids default in the fourth quarter, however, that danger will follow it into next year.
The fate of Venezuela's foreign obligations, and its government, rests partly in Washington's hands. By resorting to rule by decree through the ANC, Caracas has invited heavier sanctions from the United States — a tool Washington will keep handy throughout the quarter and beyond. The U.S. government has an array of options to increase the pressure on Venezuela, including additional sanctions against individual politicians and more severe measures such as a ban on imports of Venezuelan oil, which would make default almost inevitable. But Venezuela is hardly the only foreign policy issue facing the United States. As the U.S. government juggles competing crises around the world, it will take a measured approach to Venezuela for now to avoid triggering a full-blown catastrophe in its own backyard.
Mexico, meanwhile, could take advantage of Venezuela's straits. This quarter, it will move forward with negotiations to facilitate exports of oil and fuel to Cuba. The prospective arrangement could benefit Mexico in a couple of ways. For one thing, it would boost the country's influence in the region. For another, it would help Mexico drive a wedge between Cuba and Venezuela, giving Mexico City leverage with the United States. Cuba may have less reason to continue its close security alliance with Venezuela if it starts getting its oil from Mexico. Weakening the relationship between Caracas and Havana, in turn, would help the United States coerce the Venezuelan government into returning to a more democratic rule.
Colombia Ties Up Loose Ends
Colombia is still trying to bring its peace deal with the Revolutionary Armed Forces of Colombia (FARC) into effect. The government in Bogota will use the fourth quarter to try to wrap up legislation pertaining to the agreement. For outgoing Colombian President Juan Manuel Santos, the biggest priority will be to push legislation to begin the amnesty process for former rebels. The measures have been held up in the legislature because many lawmakers have been campaigning for re-election instead of passing bills. The Radical Change party, whose votes are necessary for the laws' passage, has also refused to vote on them unless specific changes are made. Santos has issued a decree to get amnesty courts up and running, but he still needs to pass the legislation that will keep them operating for years. If the Santos administration can't corral enough legislators into Congress to pass the laws during the current session, which ends in December, it will likely try to convene extra sessions to get the bills through. Otherwise, the process will bleed into next year, when preparations for the general elections kick into high gear. It's unclear whether Santos will succeed in this endeavor, however, given the divisions in the legislature.
As it scrambles to finish its peace deal with the FARC, the Colombian government may find itself with two more peace negotiations on its hands. The smaller National Liberation Army (ELN) will enter a cease-fire with the government Oct. 1. If the group manages to avoid kidnapping civilians or attacking security forces and energy infrastructure from that date until Jan. 12, it will improve its chances of continuing peace talks with the government after the next administration takes office in 2018. The Gaitainista Self-Defense Forces of Colombia (AGC), meanwhile, will also try to negotiate an eventual demobilization deal with the government. Like the FARC and ELN, the criminal organization will need special legislation to sanction its surrender. But in light of the upcoming elections, seeing the bill through the legislative process this year would be a tall order. Instead, the AGC's surrender proceedings will likely begin next year should the group decide to follow through with its demobilization.
Mercosur Takes a Step Toward Freer Trade
Negotiations will also figure prominently this quarter in the Common Market of the South, better known by its Spanish acronym, Mercosur. The bloc's member states are working to expand their foreign trade partnerships. After a year of discussions, negotiators from Mercosur and the European Union will be closer than ever to clinching a free trade deal; they may reach a political agreement over a future pact this quarter, before ironing out the details next year. The South American bloc's negotiating team will lobby to raise EU import quotas for select goods. Though the European Union probably will agree to increase its import quotas of beef and ethanol, products that rank among Mercosur's key exports, it may refuse to include sugar — one of Brazil's biggest export commodities — in the final deal.
As the bloc progresses toward expanding its trade ties, some of Mercosur's members will spend the quarter mired in domestic political and economic problems. In Brazil, for example, corruption investigations will keep threatening to topple President Michel Temer, but his strong ruling coalition will stave off impeachment for as long as it can. Voting to allow Temer to stand trial would disrupt parties' planning ahead of the October 2018 presidential and legislative elections; Brazilian politicians intend to use the quarter to cement their alliances and winnow their lists of potential candidates. Similarly, beginning impeachment proceedings against the president would probably have unpleasant repercussions, such as delaying the EU-Mercosur trade deal. Given the alternatives, Temer's coalition is more likely to try to keep him in power until the end the end of his term.
At the same time, Brazil will move to auction off blocks of pre-salt oil in the fourth quarter. Interested companies will submit bids for eight blocks Oct. 27. The auction is part of the Temer administration's campaign to tone down Brazil's resource nationalism and keep the country an attractive destination for international oil companies. To that end, the government has revived tax incentives for energy investments in Brazil and removed requirements mandating that state energy company Petroleo Brasileiro (Petrobras) operate each oil block in Brazil. The upcoming auction will reveal whether its efforts have paid off.
In Argentina, the results of the next legislative elections will determine the pace of economic reform in the country. Argentine voters will cast their ballots Oct. 22 to elect legislators to 127 of the 257 seats in the Chamber of Deputies and 17 of 72 seats in the Senate. Going into the election, President Mauricio Macri's Cambiemos coalition holds one-quarter of the seats in the Senate and just over one-third of those in the lower house. A significant setback in the election would risk slowing Macri's drive for reforms. If Cambiemos maintains or improves its position in Congress, on the other hand, Macri's government will feel confident enough to move ahead with economic measures in 2018, including proposed changes to the tax and labor laws. The labor reform will prove particularly contentious. Argentina's labor unions will resist the measure, which would make it easier for businesses to hire and fire employees, thereby threatening their political influence and collective bargaining power. And even if it makes gains in October's election, the ruling coalition probably won't secure the majority it needs to pass the reforms itself and will have to turn to the opposition for help.
While elections in Argentina could give proposed reforms a boost, Chile's presidential election Nov. 19 will probably postpone a change to the country's pension system. Cutting public spending is a priority for Chile, where low copper prices have taken a toll on the country's commodity-heavy economy. But as the election approaches, Chile's legislature likely will refrain from voting on potentially controversial measures to reduce pension payments. Instead, lawmakers will probably wait to pass bills about pension reform until 2018.