In Stratfor's 2018 Annual Forecast, we wrote that the administration of U.S. President Donald Trump would decide early this year either to continue talks on renegotiating the North American Free Trade Agreement or to withdraw from the deal entirely. NAFTA negotiations reached an impasse last year because Canadian and Mexican negotiators opposed U.S. demands to raise national content requirements, tighten rules of origin and eliminate investor-state dispute-settlement mechanisms. This impasse, which still exists, led us to forecast that the chances of striking a deal by the target date in early 2018 are slim.
The latest round of North American Free Trade Agreement (NAFTA) talks concluded Jan. 29 in Montreal with few signs of real progress. Talks will move to a seventh round in February, but with so little progress on the major issues holding up a deal, it looks unlikely that U.S., Mexican and Canadian negotiators will agree on new trade terms anytime soon. Even if the United States makes some small concessions, it's reluctant to concede anything that would clash with the administration's push to reduce trade deficits and to level the playing field for international trade.
Two points of negotiation have been particularly contentious: content requirements for the automotive sector and rules for dispute settlement. The United States had previously proposed that for a vehicle to qualify for tariff-free treatment under NAFTA, its parts must be 85 percent North American and at least 50 percent U.S.-derived. (Under current NAFTA rules, 62.5 percent of an automobile's parts must qualify as North American.) Canada submitted a counterproposal, suggesting that software and other technology components should be counted toward the regional content requirements outlined by the United States. But U.S. Trade Representative Robert Lighthizer rejected the proposal.
When it comes to dispute settlement, the United States had proposed eliminating the investor-state dispute-settlement (ISDS) mechanism altogether. But it is now considering a Canadian proposal to exclude the United States from the ISDS, but to keep the mutual protections the mechanism offers for Canada and Mexico.
The U.S. delegation has just under a month to more closely consider the Canadian proposals before the three parties meet again in Mexico City on Feb. 26. NAFTA talks have made enough progress to survive into the next round of planned negotiations, but if the conflicts over content requirements and dispute resolution are not resolved, it is likely that the North American powers will fail to negotiate a final deal. And though talks could be extended, the longer negotiations drag on, the less likely they will succeed and the more likely NAFTA will fall apart entirely.