WASHINGTON (Circa) — As the hours ticked away toward a deadline U.S. lawmakers had set for revising the North American Free Trade Agreement (NAFTA) this year, Canadian Prime Minister Justin Trudeau said Thursday he has a “positive” feeling about talks and negotiators are down to final conversations.
According to House Speaker Paul Ryan, R-Wis., President Donald Trump would need to notify Congress of intent to sign a new NAFTA deal with Canada and Mexico by May 17 for the House and Senate to be able to vote on it by December. Despite Trudeau’s optimism, no deal appeared imminent late Thursday afternoon.
"To be honest, we are down to a point where there is a good deal on the table…," Trudeau told an audience at the Economic Club of New York, according to Reuters. “I’m feeling positive about this, but it won’t be done until it’s done.”
Mexican Economy Minister Ildefonso Guajardo responded to Trudeau’s comments by suggesting some details still need to be worked out.
“A clarification is necessary: any renegotiated #NAFTA that implies losses of existing Mexican jobs is unacceptable,” he tweeted.
U.S. Trade Representative Robert Lighthizer said in a statement late Thursday afternoon, "The NAFTA countries are nowhere near close to a deal."
"As I said last week, there are gaping differences on intellectual property, agricultural market access, de minimis levels, energy, labor, rules of origin, geographical indications, and much more," he continued. "We of course will continue to engage in negotiations, and I look forward to working with my counterparts to secure the best possible deal for American farmers, ranchers, workers, and businesses.”
Ryan set the May 17 deadline based on the amount of time Congress must be given by law to review an agreement before Trump signs it. Under 2015 trade legislation, Trump would need to formally give Congress notice 90 legislative days in advance of signing.
“When Paul Ryan says, ‘I need the clock to start today,’…what he is calculating is what he thinks is possible in terms of session days that can be devoted to the bill,” said Tim Meyer, a former State Department attorney who teaches international trade law at Vanderbilt Law School.
President Trump’s disdain for the agreement, which was negotiated in the early 1990s and took effect on January 1, 1994, has not cooled since taking office. He declared NAFTA a “horrible, horrible disaster for this country” at a roundtable with auto executives last week.
“We’re renegotiating it now,” Trump told reporters. “We’ll see what happens. Mexico and Canada have — look, they don’t like to lose the golden goose, but I’m representing the United States. I’m not representing Mexico, and I’m not representing Canada.”
Some industries suffered significant losses in the U.S. in the wake of NAFTA’s signing, but others have benefited greatly from having markets in Mexico and Canada opened up to their products. According to Andrew Holland, chief operating officer for American Security Projects, businesses have made investment decisions over the last 25 years with the expectation that NAFTA will remain in place.
“Businesses have made substantial, substantial investments based on the understanding there would be free flow of trade across borders,” he said.
Much has changed in technology and industry in the ensuing decades, and experts agree there are many areas where revising and updating NAFTA makes sense, particularly with regard to e-commerce and intellectual property. Those are likely not the issues holding up an agreement.
“I think a lot of the low-hanging fruit has been picked and now we’re into the tougher issues,” said Raymond Robertson, a non-resident fellow at the Center for Global Development and a professor at the Bush School of Government and Public Service at Texas A&M University.
Lighthizer reportedly told a group of House Democrats Wednesday he did not expect a deal this week.
“He felt there was some back-sliding going on with Mexico, and Canada, to a certain extent,” Rep. Ron Kind, D-Wis., told Bloomberg after the meeting.
Last summer, the Trump administration released a 17-page summary of objectives outlining its demands for revisions to the deal. In November, after initial negotiations began, an updated summary was released.
Few specifics about the current state of play have been officially released, but Commerce Secretary Wilbur Ross indicated earlier this week that none of the “hot topics” have been settled.
Some of the contested provisions relate specifically to the auto industry. Trump is seeking changes to the percentage of components of a vehicle that would need to be made in North America to qualify for duty-free status. In addition, Trump wants to require that a certain percentage of a vehicle be made by workers earning a higher wage than most workers in Mexico receive.
The administration is pushing for the U.S. to be able to opt out of NAFTA’s dispute resolution mechanisms. Changes are also sought regarding Mexican and Canadian access to the U.S. government procurement market.
Trudeau said Thursday the biggest sticking point is the U.S. demand for a sunset clause that would require the deal to be reviewed every five years. Holland suggested it would also be problematic for U.S. businesses.
“That’s a terrible idea,” he said. “The whole benefit for businesses is the certainty of investment. The fact that you can know when you make an investment, you’re going to have a market, you’re going to have a secure place to export your goods or build your factory.”
One example he cited was natural gas and oil production in Texas. Energy exports to Mexico are currently booming, but building pipelines to transport gas and oil across the border is very expensive. Companies may not want to make that investment if they may not be able to continue exporting it in five years.
According to Philip Levy, a professor at Northwestern’s Kellogg School of Management who served as a senior economist for trade on President George W. Bush’s Council of Economic Advisers, one flaw in the Trump administration’s negotiating strategy is that options for resolving these conflicts are limited.
“Many of these issues do not lend themselves to easy ‘split the difference’ compromises; you cannot half-abolish Investor-State Dispute Settlement or have NAFTA half-expire in five years,” he said.
Thursday’s deadline was strictly a political one. Nothing in the original agreement necessitates acting this year and its provisions will remain in effect unless Congress or the president acts to change them.
Ryan had hoped to push a new agreement through the House with the current Republican majority before new, and potentially Democratic, members elected in November take their seats.
“The entire endgame is built around getting an agreement through Congress,” Levy said. “If the administration cannot get a deal done in time, it would then be dealing with the next Congress, the one elected in the upcoming November midterms. That Congress could will have a different composition and may have different demands for what it would require to pass a trade agreement. The administration has indicated that it thinks its chances are better under the current Congress; hence the rush.”
There is some dispute over whether Thursday truly was the last day a deal could be made and get through Congress this year. According to Meyer, Congress does not need to take the full 90 days allowed by law to review the agreement, so lawmakers could move faster if they want to.
And they may not want to. Many Midwestern Republicans have publicly and privately urged Trump to preserve NAFTA because farmers in their states could be harmed by changes. Some reforms Trump is seeking would also appeal more to pro-union Democrats than members of his own party.
“A lot of the administration’s proposals for how to modify NAFTA have just not been very popular with Congress, so it’s a little bit unclear that Congress wants to give the president time to consider a new NAFTA,” Meyer said.
The congressional deadline is not the only impetus to act soon. The Trump administration must decide by June 1 whether to continue exempting Mexico and Canada from tariffs on steel and aluminum. Tariffs were waived for the two countries at the start of May with the hope of leveraging the threat of imposing them to get a better deal.
Mexican negotiators have reasons to want a deal sooner than later as well. A presidential election will be held there on July 1, and a new president would likely bring in their own negotiating team later this year with different priorities than the current one.
According to Holland, this could be particularly problematic for U.S. energy companies if the winner is current front-runner Andrés Manuel López Obrador, a populist leftist who is expected to take a harder line on NAFTA than President Enrique Peña Nieto.
“He’s specifically said he wants to undo the liberalization of the energy sector,” Holland said, “so getting a complete NAFTA through before the election would be an important way of protecting that.”
Officials have also discussed accepting a narrower deal on issues surrounding the auto industry now and addressing other subjects later.
“The problem with the piecemeal approach is when you’re negotiating a trade agreement, you include a wide range of topics and issues,” Robertson said. That gives negotiators more flexibility and options to put together a package that satisfies all sides. Taking auto issues off the table could complicate later negotiations.
“Something on auto issues would not be balanced – it would likely be a Mexican concession to a U.S. demand, for example,” Levy said. “That may be feasible in a broader agreement, in which Mexico is ‘compensated’ elsewhere. But I doubt it would have standalone appeal.”
If Thursday passes without even a skinny deal, the Trump administration may have to choose between continuing to negotiate a trade package to present to the new Congress next year and making good on Trump’s campaign threat to abandon the agreement.
Trump told the Washington Post last April that he originally planned to announce he was pulling out of NAFTA on his 100th day in office and he had “looked forward” to terminating it. Secretary Ross and Agriculture Secretary Sonny Perdue implored him not to, even showing him a map of communities in “Trump country” that would be hurt by the move.
“It shows that I do have a very big farmer base, which is good,” Trump said in the Post interview. “They like Trump, but I like them, and I’m going to help them.”
If Trump does decide to withdraw completely, it is not entirely clear he has the authority to do so on his own, according to Meyer. The president could back out of some international provisions, but the law passed by Congress implementing NAFTA and setting tariffs might remain in effect unless the legislature repeals them.
“The result of that would be that basically his domestic law ability to set tariffs and domestic law implementation wouldn’t change,” he said. “All that would change would be international commitments to Mexico and Canada.”
If NAFTA were fully unraveled, Robertson expects trade with Mexico and Canada would revert to being governed by other standards like World Trade Organization regulations. Consumers might not see much immediate difference, but tariffs would increase modestly and supply chains would be disrupted, especially in the states that have integrated most with the Mexican economy.
“I think it’s very important to separate the difference between good policy and good politics…,” Robertson said. “Looking forward, at some point, good policy becomes important. So far, we’ve seen politics carry the day.”