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NAFTA Insights

NAFTA Insights

August 2017 - Edition 1

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Welcome to the first edition of the NAFTA Insights newsletter. These regular briefings are designed to help you keep abreast of the latest developments and business implications related to NAFTA negotiations. By combining Eurasia Group’s business-relevant political analysis with assessments of the ‘now what’ for business from the professionals of KPMG’s member firms, our aim is to enable you to be on the front foot as the process unfolds. This edition covers a sweep of the process and likely outcomes as the opening round kicks off in Washington, and we will adjust the frequency and substance of future editions to match the progress of negotiations.

The US, Canada, and Mexico are staking out their opening positions. Canada and Mexico both want to see the agreement preserved, given its importance to their economies. Trump must balance his antipathy for NAFTA, which helped him win the election and which he once called “the worst trade deal in history”, with NAFTA’s importance to US consumers and its popularity with Republican donors and members of congress. The Trump administration will seek to bridge that gap, changing and modernizing NAFTA without fundamentally altering it in ways that would hurt US consumers, companies, or workers.

So what is likely to happen?

The most likely outcome of the renegotiation — a 65 percent probability, according to Eurasia Group analysis — is a quick, relatively painless agreement by the first quarter of next year. All sides have an interest in the status quo, and a quick agreement could give Trump a concrete achievement to present ahead of the 2018 midterm elections. A rapid conclusion might require the Trump team to abandon some of its more controversial goals, but the benefits of doing so outweigh the costs.

An alternative scenario in the Eurasia Group analysis — a 35 percent probability — is a renegotiation that slips later into 2018, which would create additional political obstacles for a successful conclusion to the process.

So when will we know more?

Renegotiation will be a race against the clock, as key deadlines approach in the US and Mexico. Though there is no formal deadline, Mexican presidential elections and the expiration of trade promotion authority (TPA) in the US give the talks a functional deadline of July 2018. If the process extends into next summer, the presence of leftist leader Andres Manuel Lopez Obrador in the presidential race would make it harder for the Mexican government to accept changes. Likewise, there is a risk that negotiations would have to be reopened if Lopez Obrador wins the presidency. If a more market-friendly candidate wins the presidential race, the talks could be concluded more quickly.

A deal is likely to be finalized in late 2017 or early in the first quarter of 2018, but if negotiations slip past early 2018, the odds of a painless process fall significantly.

So who wants what?

The US administration has both general and specific goals. In general, Trump and his team (which is not fully in place) are looking to strike a balance, making real changes to an agreement they believe needs to more directly benefit US workers, while not disrupting it in ways that hurt US businesses. To that end, the overarching goal is a new deal that makes notable revisions yet is limited enough to be acceptable to domestic industries and is wrapped up before the end of the first quarter of 2018.

Regarding specific goals, the administration on 17 July released its negotiating objectives, as required by TPA. Many of these goals were unsurprising and will be relatively uncontroversial, such as adding a chapter on digital trade and increasing protections for intellectual property. But others, including reducing the US trade deficit with Mexico, eliminating the Chapter 19 dispute settlement mechanism, and language prohibiting currency manipulation, are likely to be more contentious. Overall, the US objectives are consistent with the Eurasia Group view that renegotiation will be relatively painless, provided USTR Robert Lighthizer and his team are willing to compromise on the most controversial portions of their agenda.

For both Canada and Mexico, the ultimate goal will be preservation of NAFTA. The accord has been a boon for both countries, particularly for Mexico, where it has catalyzed years of growth. Both countries have matters they would like to see resolved in the talks, such as disputes over dairy and softwood lumber for Canada and the continued opening of the energy sector for Mexico. That said, NAFTA’s survival as the bedrock of an integrated North American market will be their primary goal.

So what should you look out for?

The negotiations themselves will take place behind closed doors, but details will leak out. The most important aspects of the talks to follow are:

  • Chapter 19 dispute settlement mechanisms: The Trump administration wants to eliminate them, but both the Mexican and Canadian governments want to preserve them.
  • Rules of origin: Strengthening the rules is something the US thinks would help to make its manufacturing sector more competitive, though doing so could be very disruptive for existing value chains and is therefore a sensitive issue in the negotiations.
  • Trade deficit reduction targets: Mexican negotiators could not accept overly ambitious and onerous targets.
  • Labor standards: The Mexican government is willing in principle to make changes to its labor laws and to raise the minimum wage to satisfy US demands, but its room for maneuver will be limited after approving a labor reform at the beginning of President Enrique Pena Nieto’s term.

If these issues have not been settled by the end of this year that would be a negative sign for the talks. Similarly, silence from political leaders — especially Trump — would be a good sign. If the negotiations can be kept out of the public eye, they are much more likely to succeed.

 

 

As always, please reach out to us and the team for any questions, queries or opportunities: GO-FM Geopolitics.

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