Nafta's Biggest Challenge Will Come After Negotiations End

(Bloomberg View) -- U.S., Canadian and Mexican negotiators are cloistered in the Camino Real on the edge of Polanco in Mexico City, their sessions extending late in the night as they prepare for the arrival of ministers for the next round of talks on the North American Free Trade Agreement.

To contrast with the crackling tension ending the earlier meetings in Montreal, the Mexicans hope to leverage the rapport built between Mexican Commerce Secretary Ildefonso Guajardo and U.S. Trade Representative Robert Lighthizer and announce new common ground.

Yet even if negotiators overcome still daunting differences, Nafta may still hang. It won't necessarily be President Trump who kills a new accord; instead, the biggest threats may lie in issues of timing and circumstance beyond any one leader's control.

Among the chief disagreements still to be resolved, the preservation of dispute resolution mechanisms has been less important to Mexico, as these generally protect American companies in Mexico rather than the other way around. Mexico also sees a way to finesse U.S. demands for a sunset clause for Nafta with a commitment to periodically reevaluate rather than end the agreement in the future. And it is betting that labor law changes made for the Trans-Pacific Partnership can assuage current complaints from its two northern neighbors. Most dramatically, Mexico plans to unveil a rules of origin proposal to meet the Trump administration's steep demands for upping not just North American but also U.S. content and to potentially reduce the sector's ire-inducing trade deficits.

Beyond the already visible differences, a problem for Mexico is that while it might be willing to accede to several points, it needs Canada by its side. It can't sign a bilateral agreement -- despite Trump's frequent prodding -- without losing political face and providing damning proof to critics and potential voters that the government has sold out to the Yankees.

And the Canadians are maintaining their harder line. Although they may bend on getting rid of Nafta's investment dispute settlement mechanism, they are likely to insist on limiting the U.S. use of antidumping and countervailing tariffs against its neighbors. This was a must-have for the Canadians in both their initial 1988 bilateral agreement and in Nafta; the tariffs that the U.S. has recently imposed on Canadian lumber and paper, and tried to impose on passenger jets, give the Trudeau government even more reason to hang tough.

Yet even if the three countries can bridge their current deep divides, upcoming elections pose a profound challenge.  On July 1, Mexican citizens will elect a new president and more than 3,000 officials, including every member of the House of Representatives, a third of the senators, and eight governors. In this highly contested set of races, the economic model of the last 30 years, of which Nafta is an integral part, is in effect on trial.

That makes the timing of any announced compromise on Nafta tricky. A resolution before the election opens the ruling Institutional Revolutionary Party and its presidential candidate Jose Antonio Meade (lagging third in the polls) to broadsides from every direction, with every other aspirant sure to boast they could have gotten a better deal. Trump will aid these critiques, undoubtedly crowing about his huge win over Mexico, a country that until he came along was “killing us on jobs and trade.”

Yet waiting until after the election has huge risks on both sides of the border. Even if today's Mexican negotiating team approves a new Nafta, tomorrow's Mexican Congress may not. A July announcement all but pushes the ratification in Mexico to this new body, which will take its seats Sept. 1 (followed by the president's inauguration three months later). A victory by current front-runner Andres Manuel Lopez Obrador, a leftist who has already called on the government to stop negotiations and wait for (presumably his) new administration, could make the new legislature less likely to rubber-stamp any agreement reached by the preceding administration.

A July announcement also runs into the U.S. electoral calendar. Under current Trade Promotion Authority (which needs to be renewed in July), after reaching an accord U.S. negotiators need to wait least 90 days before officially signing. This waiting period is extended to 180 days if negotiators have made changes to how trade remedies work (which is likely). Then, before bringing it to a vote in the Congress, they need to wait up to another 105 days for an International Trade Commission study on the effects on the U.S. economy. That would put passage in the hands of a new Congress -- which could be Democratic, at least in the House.

If the original Nafta fights are any guide, a Democratic-led House would require significant changes before approving a Trump-led bill, pushing passage deep into 2019. And in the face of Democratic opposition, Trump himself might want to keep the Nafta drama going, using it as a platform for his 2020 reelection campaign.

In the end, after at least seven rounds of ministerial talks, dozens of working groups and thousands of hours, a modernized Nafta may fail on the drawing board or in the legislatures. But what all the talks and tensions have done is to rally Nafta's once passive beneficiaries to its cause. Which means that Nafta, whether old or new, will likely continue.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shannon O'Neil is a senior fellow for Latin America Studies at the Council on Foreign Relations in New York.

To contact the author of this story: Shannon O'Neil at soneil@cfr.org.

To contact the editor responsible for this story: James Gibney at jgibney5@bloomberg.net.

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