What happens if Mexico, Canada and the United States fail to reach an agreement on how to upgrade the North American Free Trade Agreement (Nafta) and Donald Trump gives the order to pull out of the trilateral free trade accord?
Would the U.S. president dare to slap punitive tariffs on his two neighbors? Could all the American-made products that expats now find so readily available in Mexico suddenly become 30 percent more expensive after this country places reciprocal duties on imports?
Few believe this is a possible outcome to talks that began this week with an opening round in Washington D.C. with the aim of modernizing the 23-year-old trade deal.
However, the protectionist demands of the Trump administration are certain to make the negotiating table a bruising place to be. U.S. Trade Representative Robert Lighthizer set the ball rolling this week, saying the agreement required major surgery, not small tweaks. Like Trump, he alluded to the thousands of industrial jobs that have been lost as a result of Nafta, although he conceded that many U.S. farmers have benefitted.
Chief among the aims of U.S. negotiators is finding mechanisms to reduce the United States’ $US65 billion deficit with Mexico.
Mexico has already shown some willingness to get on board, with Finance Secretary Ildefonso Guajardo promising to explore ways to lower the deficit, as long as it doesn’t mean sacrificing this country’s competitiveness.
However, suggestions that Nafta’s labor regulations can be altered in some way to ensure Mexican workers are paid higher wages and thus redistribute uneven market share between the two nations have been met with skepticism south of the border. Guajardo stressed that the topic won’t be under discussion during the negotiations, since salaries in Mexico require the input of “various actors within the Mexican economy.”
Mexico – and Canada in particular – are also expected to balk at moves by the United States to change the mechanism by which disputes over tariffs and duties are settled. Trump wants to scrap the “Chapter 19 panels” – which he says violate U.S. sovereignty – and replace them with a mechanism that allows the United States to impose anti-dumping tariffs if imports are harming or threatening to harm domestic industry. Distrustful of the U.S. court system to settle disputes objectively, Canadian Prime Minster Justin Trudeau has inferred that Canada might walk away from the table if the United States insists Chapter 19 be dumped.
Another sticking point is likely to be Mexico’s reluctance to change rules of origin regulations regarding minimum regional, or NAFTA-wide, content requirements.
Both Mexican and the United States are anxious to fast-track the negotiation process – both countries hold elections next year – but the amount of detail involved is immense, and few observers believe a deal can be finalized before the end of the year.
Chief in the minds of senior Mexican and Canadian negotiators will be how to construct a deal that allows Trump to save face with his base, while not compromising the essentials of an accord that both nations believe has mostly worked in their interests for the past quarter century.