In Stratfor's 2017 Fourth-Quarter Forecast, we said that NAFTA members would continue to struggle to negotiate a new version of the deal. As the fifth round of talks come to a close, Canada, Mexico, and the United States are still fixed to their respective positions, putting the future of the agreement in question.
Are NAFTA talks on life-support? That's the question being raised after the fifth round of discussions in Mexico City ended Nov. 21. Following the talks, United States Trade Representative Robert Lighthizer lamented "the lack of headway" made and that Canada and Mexico were unwilling to "seriously engage on provisions that would lead to a rebalanced agreement." Canada's lead negotiator, Foreign Affairs Minister Chrystia Freeland, reiterated the Canadian stance that the United States' proposals were "extreme" ones that Ottawa could "simply not agree to."
The participants' sour tones were not unexpected; the same sticking points that stalled the fourth round of talks, which took place in October, carried over into this latest round. The most controversial issue among them was a U.S. proposal for the automotive sector to require 50 percent of a product's value-add to come from the United States to qualify for NAFTA. During negotiations in Mexico City this week, Mexico and Canada did not even bother offering counterproposals on that issue. Instead, Canada's negotiators focused on explaining why it was a poor idea and illustrating how integrated the North American auto sector already is. Mexico, meanwhile, tried to avoid the issue altogether in protest. The United States is intently focused on making changes to NAFTA to reduce its trade deficit with Canada and Mexico, so a failure of the participants to agree on the auto sector proposal could be a death knell for NAFTA talks as a whole. After all, the automotive sector accounted for $63.7 billion of the $83.3 billion trade deficit that the United States had with Canada and Mexico combined.
Originally, NAFTA members planned to hold their talks at an accelerated pace and complete all seven rounds by the end of 2018, with meetings occurring about every two weeks. But given the difficulty of the negotiations, that cadence has changed: There was a monthlong break between this round and the previous one, and the next round, in Montreal, won't begin until Jan. 23. With such long delays, scheduling will be difficult. Because of U.S. restrictions about using the "fast-track" method to approve trade deals, the United States cannot sign a new deal until March — and then Congress could delay approving it for another six months.
Any delays beyond February or March would expose the NAFTA negotiation timetable to political challenges. Mexico's presidential election is July 1 and U.S. midterms take place in November, so the talks could certainly be bogged down throughout 2018. And Mexico and Canada might even decide that making no deal at all is better than capitulating to U.S. demands. After all, most U.S. tariffs for World Trade Organization members outside of free-trade agreements are relatively low, including just a 2.5 percent tariff on most small vehicles. Walking away, while not particularly desirable, is a viable option for both Mexico and Canada.
As the talks drag on, U.S. President Donald Trump's threats to withdraw from NAFTA become more and more realistic. At the same time, domestic pressure on Trump to prevent such an exit will increase. Already, the U.S. business sector is preparing potential legal options to challenge the withdrawal; it is unclear whether Trump has the authority to legally dismantle the U.S. architecture supporting NAFTA, since the majority of it was developed through legislation. Another possibility is that Congress could attempt to pass a similar law to those governing Russian sanctions, which would require Congressional review for any NAFTA-related actions Trump attempts. (Of course, Trump could be compelled to follow through with his withdrawal threat before the law comes to pass.) Though the argument could still be made that NAFTA will not collapse, there is no indication that the United States, Canada and Mexico will modify their demands on key sticking points. If they don't, all of the many competing contingency plans that have been floated as merely hypothetical so far will become very real possibilities.