October 2017 – Edition 3
Some progress has been made since the last NAFTA Insights, but negotiations may be facing increased headwinds on issues of greatest significance to each respective country. With Eurasia Group providing the latest developments from Round 3 of the NAFTA renegotiations, this edition considers what the quick wins and potential sticking points could mean for business.
Once again, the third round of NAFTA negotiations concluded without tangible progress. Despite some optimism among negotiators about the pace of talks and remaining on schedule, the lack of real breakthroughs in Ottawa, Canada and the absence of any formal proposals to amend the deal’s most contentious issues, signals that the process is moving slower than anticipated. For instance, representatives discussed modifications to Chapter 19 dispute resolution mechanisms, but no consensus was reached.
A concerning sign is the emergence of new proposals that Canada and Mexico are unlikely to accept. The US has taken a harsher position on rules of origin, proposed a sunset clause (that would terminate the Agreement at the end of 5 year intervals, unless all countries agreed to extend), and suggested new seasonal restrictions on imports of agricultural goods from Mexico and Canada.
Nevertheless, Eurasia Group’s base case remains that a relatively painless renegotiation should be concluded by the end of the first quarter of 2018, for several reasons. First, the US is seeking to gain leverage on key issues, but by the end of the year, the Trump administration, according to Eurasia Group, will probably be willing to settle for whatever has been accomplished in order to avoid a delayed agreement.
All parties are aware of the timing risks—that is, the approaching electoral cycles in the US and Mexico—and are therefore eager to avoid jeopardizing the deal. The main risk is that a delay would overlap with the campaign season and presidential election in Mexico to be held in July 2018. Incentives and strategies on the Mexican side will probably change as the election approaches as it will likely become more difficult to negotiate at a time when the opposition—in particular, frontrunner Andres Manual Lopez Obrador and his Morena party—will be very critical of the government’s handling of relations with the US. In the US, a delay would run up against the elections for House and Senate in November 2018. Eurasia Group predicts that finalizing a deal may become more challenging if Democrats take control of the House of Representatives thereafter.
Other topics that look to advance quickly and comparatively easily include: competitiveness; transparency and anti-corruption; investment; and intellectual property.
More to come on: labor; environmental standards; dispute settlement; agricultural goods; state-owned and controlled enterprises; government procurement; and cross-border trade in services.
What is most important to business operating in a global economy isn’t just whether the rules are negotiated in your favor. Rather, of utmost importance, recognized by the NAFTA negotiation teams, is that there is long-term predictability (certainty) in the agreement.
Clarity over renegotiations has been slow, and for every proposed viewpoint, there will be counter viewpoints. But, as we noted in our last edition, business can start analyzing the potential impact now. The next best thing to having the right answers is asking the right questions - as a snapshot:
As always, please reach out to us and the team for any questions, queries or opportunities: GO-FM Geopolitics.
KPMG in Canada, Mexico and the US and Eurasia Group have jointly published this briefing to provide clients with unique insights that combine Eurasia Group’s forward-looking analysis of political developments with KPMG’s knowledge and experience across audit, tax, advisory and company-level business implications.