The fourth round of NAFTA negotiations concluded with Mexico and Canada rejecting US proposals, however, an agreement is still likely.
Since the last NAFTA Insights, negotiations are getting tougher. With Eurasia Group providing the latest developments from Round 4 of the NAFTA renegotiations, this edition considers how negotiations could impact your cross-border trading and when you should act.
So what’s the latest on negotiations?
The fourth round of the NAFTA renegotiation concluded on 17 October with Mexico and Canada firmly rejecting protectionist proposals from the US. Although Eurasia Group considers that ultimately a deal is still likely (55 percent), a hardened US stance and a tight deadline raises the risk that negotiations will falter.
Nonetheless, the decision following this round to extend the talks eased fears a US withdrawal from the deal was imminent. That said, Eurasia Group considers that there is a significant risk the US administration may want to use the trigger of the withdrawal process to increase pressure on Mexico and Canada to accept US demands rather than to walk away from the pact completely.
Eurasia Group considers this strategy would probably backfire given that Canada’s and Mexico’s first response would likely be to refuse to negotiate under those circumstances. The proposals include several red lines for both countries, such as disruptive changes to rules of origin in the automotive sector, elimination of the dispute settlement mechanism, and a 5-year sunset clause. Moreover, the perception that those changes will likewise face opposition in the US reduces incentives for Mexico and Canada to accept them.
Eurasia Group points out that US Administration mounting frustration with Congress, the Republican Party, and his inability to deliver on his campaign promises in part explains why the US has been taking a tougher and more extreme stance at the NAFTA talks. He is seen to need a political win and is probably looking to achieve one through the renegotiation process. However, Eurasia Group thinks that pressure from different groups including his advisers, Congress, and the business community will likely be able to contain the threats and prompt US Administration to walk back some of the “poison pill” proposals presented during this latest round.
Those proposals pertain to rules of origin for the automotive sector (a 50 percent US content requirement and an 85 percent minimum for the region), dispute settlement mechanisms, Canada’s supply management system, and government procurement. There is room for consensus on all proposals, with the issue of dispute resolution mechanisms being the most difficult one. Mexico and Canada will likely hold out on some of the less contentious issues, including final text for digital trade, anticorruption policies, and intellectual property rights, in order to gain leverage and find a middle ground. Ultimately, whether a deal is concluded is contingent on the US lessening its demands.
The fifth round of negotiations has been scheduled for 17-21 November in Mexico City. Barring a surprise announcement by US Administration, the next month will be relatively quiet as negotiating teams reassess their strategy behind closed doors.
So what could this mean for you?
While the negotiations are fluid, it is important to stay informed and understand how the issue will affect your operations.
The details and ‘end game’ of NAFTA negotiations remain unclear. But what we do know is that these ‘known unknowns’ will likely impact companies in three principle ways:
So how might negotiations impact your business?
We spoke last time about rules of origin, possible tariffs, regulatory practice and eCommerce and digital trade (Edition 3), but efficiency of trading and the ability to trade may also be impacted by negotiations on:
Companies also need to understand if there will be impacts on their ability to send people to the US to work with suppliers and provide after-sales service to American customers. For example, the ability of Canadian or Mexican professionals to provide services in the US may be adversely impacted if the US were to withdraw and eliminate the Trade NAFTA designation (“TN immigration status” which was created through NAFTA)
On the protection of rights:
Renegotiations may also extend to an overhaul of Chapter 11 Investor-State Dispute Settlement (ISDS) provisions (i.e., companies versus governments)
Less efficient trade or the weakening of dispute settlement mechanisms can also impact the ability of a company to trade, or access a market. As we are seeing in the recent case of aerospace and defense companies, the proposed imposition of anti-dumping duties will, in practical effect, severely restrict access to the US market – and the removal of Chapter 19 (or Chapter 11) would limit chances of quicker and easier redress in such a situation.
Meanwhile, a withdrawal from NAFTA could increase comparative tariffs to the extent that Canadian softwood lumber companies become uncompetitive in servicing the US market (for example).
On the flip side, renegotiations may open up market access in energy and telecommunications (Edition 3), in addition to potentially impacting the following:
So when should you act?
When you need to take action depends chiefly on what you do.
If a shift in the trading rules will merely make your operations less efficient (slower, more costly, more complicated), you may be able to delay executing on plans until you know more. But it is worth modelling the impact of how different scenarios will impact your business – just how much cost (or delay) will your business have to absorb before it is able to adapt? Some companies are already using various tools to identify issues and model such impact.
If NAFTA renegotiations or a withdrawal would severely restrict your business’s ability to trade (wholly or for a particular product), immediate planning is necessary. When you need to execute depends on a number of factors – necessary lead time, the risk (cost) of it occurring versus moving first, etc. – but for a few companies, it may in fact need to be before negotiations wrap up (or a country exits). If you fall into this category, it is important not only to prepare impact models, but also to:
For certain companies, the NAFTA negotiations may open up a range of new opportunities. For other companies, the results of the negotiations may trigger significant disruptions to their supply chain. In either case, those companies that undertake scenario planning now will be the ones best positioned no matter what the outcome.