Obstacles to new NAFTA deal include process for resolving disputes, ‘rules of origin’ for autos

Negotiators from Canada, Mexico and the United States have begun their seventh round of discussions for a new, or modernized, North American Free Trade Agreement. And while the dissolution of NAFTA seemed very likely several months ago, negotiations are still alive.

To this point, results of the trilateral discussions have been mixed — consensus on some changes, but continued disagreement on issues such as dispute resolution and “rules of origin” that could ultimately block a new deal from being reached. According to Scotty Greenwood, CEO of the Canadian American Business Council, the big question right now is this: “Do the political leaders want to come to an agreement by late March?” If not, NAFTA discussions may halt because of Mexico’s pending presidential election. Greenwood sees three possible scenarios.

1) Reach an agreement in the areas in most need of change, declare that NAFTA has been modernized, and conclude discussions.
2) Announce that there are no plans to tear up NAFTA, but that the agreement needs a comprehensive review and update. Under this scenario, negotiators would continue at their own pace. 
3) The United States withdraws from NAFTA and tries to reach separate bilateral trade agreements.
One major sticking point in NAFTA negotiations involves the process for settling trade disputes. Currently, they are heard by a trilateral NAFTA court. U.S. Trade Representative Robert Lighthizer wants the process moved to the U.S. court system (for cases that involve the United States).
Another obstacle is a proposed revision by the United States to the “rules of origin” for automobiles. Right now, for vehicles to avoid tariffs, at least 62.5 percent of their net cost must come from NAFTA countries. That threshold would be raised to 85 percent under the U.S. proposal; the Trump administration also wants a minimum U.S. content quota of 50 percent.
New trade rules are often considered after complaints by an affected industry, but this wasn’t the case with the proposed changes to the auto rules.“The U.S. auto industry doesn’t like [the proposal] and doesn’t support it,” Greenwood notes.
President Donald Trump’s opposition to trade agreements such as NAFTA was a cornerstone of his 2016 presidential campaign. But the fact that he has not yet withdrawn from the three-nation pact may be partly due to the work of farm groups and manufacturers in highlighting the impact of a NAFTA dissolution on state economies.
U.S. Sen. Charles Grassley of Iowa told Bloomberg News that ending NAFTA could cause a rural depression, or at least a Midwestern agricultural depression. The U.S. Chamber of Commerce issued a report in the fall ranking the states that would be hardest hit by a NAFTA withdrawal; most were in the Midwest. While the trade pact has caused job losses in this region due to companies moving operations to Mexico, some workers have benefited.
For example, according to the chamber’s report, about 39 percent of Michigan’s total GDP comes from trade, and 65 percent of that trade is with Canada and Mexico. In Wisconsin, close to half of the products from the state’s manufacturing sector go to Canada or Mexico, and Mexico is the largest export market for the state’s dairy industry.
Stateline Midwest: March 20182.88 MB