NAFTA fight simmers on back burner

U.S. withdrawal remains a risk

NAFTA observers such as Kellie Meiman Hock, left, and others say talks could limp along or be punted to next year.

WASHINGTON — Amid the very real threat of a global tariff war, uncertainty surrounding the NAFTA renegotiation may not top the auto industry's concerns anymore. That means the talks will probably remain stalled while political and industry leaders tend to more pressing threats.

The renegotiation process was supposed to be a six-month sprint, ending last December in time to achieve legislative reviews in each nation before Mexican and U.S. elections that could replace many decision-makers. But that clock has run out. Mexicans headed to the polls this past weekend. And a U.S. congressional deadline to get a NAFTA review rolling ahead of the midterm elections passed in May.

The NAFTA talks have been overshadowed in recent weeks by a torrent of other trade-related developments with potential, and real, negative consequences for manufacturers, including the U.S. implementation of steel and aluminum tariffs, pending tariffs on strategic Chinese imports, including vehicles and many components, retaliation from trade partners that could spiral into a trade war, U.S. threats to impose 25 percent tariffs on imports of autos and auto parts, broad sanctions on Iran, and even the North Korea nuclear disarmament talks.

Compared to all the other anti-auto tariffs in play, "you can forgive me a little bit for feeling that the NAFTA discussion is sort of a quaint idea," Global Automakers President John Bozzella said during a panel discussion here last month.

The U.S. insistence on a five-year sunset provision that would kill NAFTA unless all parties opt to renew — a provision roundly rejected by Canada, Mexico and the auto industry — shows how far apart the parties are on substantive issues such as autos and government procurement, Kellie Meiman Hock, managing partner at McLarty Associates, said at the Washington International Trade Association event.

She and other observers expect the NAFTA talks to limp along or be punted to next year, although the possibility remains that President Donald Trump, frustrated that Mexico and Canada won't make heavy concessions, will move to withdraw from NAFTA altogether, dealing a defeat to the auto sector's global competitiveness.

The threat of a withdrawal was central to the Trump administration's negotiating strategy. But it became tenuous as the U.S. negotiating team came to terms with the potential impact on U.S. agriculture and other export sectors. Threats to impose steel and aluminum tariffs on Canada and Mexico did little to change the course of talks.

"President Trump tremendously overestimated the amount of leverage the U.S. has in a trade negotiation with Canada," Matt Gold, an adjunct professor of law at Fordham University and former deputy assistant U.S. trade representative for North America, said in an interview on Canada's CTV News Channel. "He also hugely overestimated the additional leverage he could create by threatening to withdraw from NAFTA and the additional leverage he could create by imposing steel and aluminum tariffs."

He added: "I don't think there's going to be an agreement until the new Mexican administration is up and running next January and February."

Meiman Hock, a former U.S. trade negotiator with responsibility for South America, didn't rule out the prospect of Trump giving notice to withdraw from NAFTA before the midterm elections to show toughness on trade, especially if steel and auto tariff actions don't force Canada and Mexico to soften their positions.

Companies should plan around several possible scenarios, she said.

The talks could simply drag out, with little progress at the next meeting and beyond. Officials could also publicly acknowledge that little progress will be made during a chaotic political season and formally push negotiations until next year, after Mexico's new government and Cabinet are situated.

If the three nations can agree on how much to raise the threshold for regional content of autos produced in North America to qualify for duty-free status (currently 62.5 percent), the Trump administration might package that with other completed topics and claim victory under a modernized deal.

The administration is proposing that wages of at least $15 an hour be one component in measuring the eligible regional content of a car, though that would open up new complications.

"If there is the introduction of wages into the calculus of rules of origin for autos, in my assessment, you'd need to take that to Congress because there's no mention of labor in the original [core] NAFTA," Meiman Hock said. "Wages aren't in there either. So, it would be such a big change in definition of how we conceive rules of origin that it would have to go to Congress" for approval.

You can reach Eric Kulisch at ekulisch@crain.com

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