As 2018 kicks off, the future of the North American Free Trade Agreement remains somewhat hazy. Certain indicators from Davos, and the most recent round of negotiations help us understand the position of negotiators, and whether or not the agreement is secure.
NAFTA was heavily criticized by Donald Trump in 2016-17, and withdrawal has been touted frequently as a threat if the U.S.’s demands are not met. These threats have continued throughout negotiations, heading into 2018. While this is simply a threat and most know that the U.S. would prefer to maintain the agreement, the aggressive rhetoric puts Canada and Mexico in a difficult place going into negotiation. Trump has stressed that Canada and Mexico need NAFTA to survive, and that the U.S. will be mostly unaffected if the deal goes down in flames. Whether this is true or not remains to be seen, but continued threats to defect from NAFTA do not endear us to our allies, and will make them more likely to defect themselves.
Despite heated rhetoric, situation presents an interesting opportunity to examine and reform the agreement, as all sides have parts they’d like to change. The U.S. has been most vocal about these changes. The administration has stressed the importance of digital goods and intellectual property laws, as well as reducing the U.S.’s trade deficit with Mexico. They also mention “eliminating non-tariff barriers” to U.S. goods in NAFTA countries. While this could mean a number of things, it is clear the U.S. intends to take a hard line backing U.S. exports, as well as protecting agriculture and manufacturing jobs in the U.S. In specific, the auto manufacturing industry is a target for “rules of origin” reforms. Robert Lighthizer has been negotiating hard for a requirement that 50% of automobile content be U.S. made, for automobiles to be sold without tariff.
Mexico’s case is particularly interesting, as they’ve got an election coming up in 2018. It remains to be seen if Mexico will follow suit by electing a populist president into office. Mexico’s corn and soybean industries have taken a huge hit since the implementation of NAFTA, and their disgruntlement will be reflected in the polls now more than ever. NAFTA’s positive effects have primarily occurred in urban areas, especially those in Northern Mexico. Mexico’s goals for negotiation are similar to the U.S.’s, in that they want to include neglected regions in the success of globalization. Another large factor is Mexico’s dependence on exporting to the United States. 81% of Mexico’s total exports are sold to the U.S., and Mexico aims to diversify their trading partners over time.
Donald Trump’s recent speech at Davos has signaled an easing of his once aggressively reclusive rhetoric. While still stressing an “America First” agenda, he pivoted to include the success of other nations in this process (a stark contrast to his tweets regarding Davos and its attendants). He expressed his openness to negotiating with TPP countries, as an attempt to retain an American trade presence in the region. While not explicitly saying he would re-enter TPP, he said he would “consider negotiating… perhaps as a group if it is in the interest of all” regarding countries in TPP. While this can be interpreted as more positive rhetoric on globalization, it is difficult to read, as it comes off the heels of a tariff on imported solar panels and washing machines. While the tariff was primarily placed to punish Chinese and South Korean manufacturers, it applies to all imports of this kind from any country.
The one thing we can be certain of is that President Trump’s word is always changing, and entirely uncertain. Mexico can still glean that the U.S. will likely look to negotiate rather than withdraw, but the terms of which will still be harshly negotiated. Mexico’s Economy Minister, Ildefonso Guajardo, stated that Mexico is willing to stay at the table to find a solution. He also stated that North America would have tremendous difficulty if the agreement collapsed, and this is enough negative incentive to keep all parties at the table until a compromise is reached. For the time being, it appears as though the U.S. has adopted a more patient approach.
It will likely take months before an agreement is reached, and we could see a variety of changes to NAFTA in order to keep all parties satisfied. When a decision is reached, expect a large reaction from markets. Uncertainty has plagued many sectors due to NAFTA’s hanging in the balance.