As nearly 700 officials gather this week to discuss overhauling the free-trade agreement between the United States, Mexico and Canada, participants and analysts say the negotiations are at an increasing risk of failure.
President Donald Trump’s Twitter bombs and rhetorical attacks on what he calls the “worst deal ever made” and his administration’s vague and confusing proposals have dismayed Canada, which is now exploring backup options. And they have infuriated Mexico ahead of a presidential election in which voters are demanding that their leaders stand up to the United States.
If officials cannot make more progress in revising the North American Free Trade Agreement this week — the meetings in Washington starting Wednesday are the fourth of seven scheduled rounds of negotiation — the odds of reaching a deal will fall even further. That would give an opening to Trump to exit the agreement, a move that could disrupt the North American economy.
This could be the decisive week. Canadian Prime Minister Justin Trudeau flies to Washington on Tuesday for a meeting with Trump about the negotiations and will then fly to Mexico to update President Enrique Peña Nieto. Meanwhile, the U.S. negotiating team is expected to finally reveal its hand at the fourth round of talks.
But there are growing risks that the U.S. negotiating stance could underestimate the limits of Mexican and Canadian leaders and inadvertently wreck the accord. “We’re being faced with a U.S. set of demands that is framed by an ‘America first’ perspective,” Lawrence Herman, a Toronto trade lawyer, said. “That colors the negotiations in a very negative way.”
Those who believe that Trump wants NAFTA to fail think he may plant poison pills so unpalatable that Mexico, which has a presidential election next July, might withdraw on its own. Others believe Trump is fulminating as a bargaining ploy.
“I think failure is an option,” said C. Fred Bergsten, a veteran trade expert and senior fellow at the Peterson Institute for International Economics. “It depends on whether the Trump people follow through on their rhetoric.”
Although Trump has blasted NAFTA, he has not yet submitted the formal six-months’ notice required to pull out of the treaty. Instead, his administration has floated the idea of a “sunset clause” that could terminate the agreement after five years, creating uncertainty and discouraging the international investment NAFTA was meant to promote.
And Trump’s team has talked of wiping out bilateral trade deficits — a move that trade experts call “economic nonsense” and one that could be a red line for Peña Nieto, who is worried about being seen as bowing to Trump on unreasonable demands.
One source of uncertainty and frustration in Canada and Mexico is that the Trump administration has not yet made concrete proposals on the most contentious issues — although these may be coming at the fourth round in Washington.
They include “rules of origin,” or the percentage of parts that must be made in North America for a product to qualify for free-trade status; language on how to settle disputes affecting foreign investors; changing Mexican labor standards; and Trump’s stated goal of reducing U.S. bilateral trade deficits.
Robert Lighthizer, the U.S. trade representative, has also blamed some of the problems with the talks on a “whole complicated process” that requires negotiators to clear positions with members of Congress and officials at other agencies.
The delay might also reflect disagreements within the Trump administration. Lighthizer, who is seen as solidifying his control over trade policy, is considered more aggressive about overhauling NAFTA than is Gary Cohn, head of Trump’s National Economic Council. Commerce Secretary Wilbur Ross probably falls in the middle.
Peter Navarro, the trade hawk who initially had his own independent office, was moved last month to Cohn’s staff, with less direct access to the president.
In Mexico, “informed people are in favor” of striking a deal, said Jorge Guajardo, formerly Mexico’s ambassador to China and now a senior director at McLarty Associates. “But that doesn’t play well politically.” He added, “The mood is set in Mexico for the president to pull out, to call his negotiators back to Mexico City.”
Kurt Honold, president of the Tijuana chapter of Mexico’s Business Coordinating Council, a coalition that advises the country’s NAFTA negotiating team, agrees. “I think the moment could come when you say, fine, we have a lot of opportunities elsewhere, and the biggest losers will be the United States.” Honold said. “The only thing Trump is doing is isolating himself from the world.”
Some of Peña Nieto’s advisers, notably Foreign Minister Luis Videgaray, believe that Trump adviser and son-in-law Jared Kushner will persuade Trump to accept a moderate NAFTA revision. Others, such as Economy Minister Ildefonso Guajardo, are said to be more pessimistic.
Canadian officials are also up in arms. “There isn’t a shared vision, certainly on the part of the president of the United States, on what we’re trying to accomplish,” said Jean Charest, a former premier of Quebec.
“While there is room to update and improve these hot-button issues, the U.S. position seems to be take it or leave it,” says Laura Dawson, director of the Canada Institute at the Wilson Center in Washington.
She said the Canadians are now considering plan B options, including an effort to persuade U.S. trade and business groups worried about a NAFTA breakdown to go to court to challenge the administration’s ability to unravel the deal without congressional oversight.
“The Americans came to the table in Round 1 and somewhat expected the Mexicans and Canadians to kind of just be ready to dance, and I think they were surprised by the fact that each country had its own red lines and made its own positions very clear,” said Michael Camuñez, a former U.S. assistant secretary of Commerce in the Obama administration.
Mexico’s brightest red lines are linked to a Trump administration proposal to “reduce the trade deficit with the NAFTA countries” as part of the negotiations, and to rules of origin.
The U.S. trade deficit with Mexico is $64.4 billion — roughly 6 percent of Mexico’s economy. Erasing that deficit would probably mean a sharp contraction in the Mexican economy.
That in turn could lead to instability and more migrants to the United States.
Plus, there’s no mechanism for doing that. “How do you write that into a trade agreement?” said Chad P. Bown, a senior fellow at the Peterson Institute. “It’s the kind of thing that depends on the market.”
Moreover, the trade balance is changing. Mexico has opened up its state-run oil and gas sector to foreign companies. U.S. exports of natural gas to Mexico are growing quickly as new pipelines are completed. Cheniere, the Louisiana exporter of liquefied natural gas, said that Mexico is currently its largest customer.
Mexico could also get hit by changes in the “rules of origin,” which are designed to prevent countries outside North America from using the treaty as a back door into the U.S. market. Under NAFTA, 62.5 percent of the value of an imported vehicle must originate in Canada, Mexico or the United States for that vehicle to get duty-free access to the region.
However, data from the National Highway Traffic Safety Administration shows that U.S.-Canadian content combined makes up just 24 percent of the value of vehicles exported from Mexico to the United States. The Trump administration is weighing a U.S.-only content requirement that could range from 35 percent to 50 percent, according to news reports.
Canada could get hurt if the United States insists on abolishing controversial special courts set up under NAFTA to review anti-dumping or countervailing duties.
Trump’s recent move to slap 219 percent tariffs on Canadian jetliners to block a sale to Delta have reinforced Canada’s view that the courts are needed to restrain U.S. measures.
Lighthizer is expected to try to nix another transnational court for investment disputes, and has backing from a wide variety of constitutional lawyers, environmental and labor groups, and conservative think tanks that say the special courts encroach on U.S. sovereignty.
But the heads of the U.S. Chamber of Commerce, National Association of Manufacturers and Business Roundtable wrote an Aug. 23 letter saying that weakening the process would “undermine business community support.”
The challenges to revising the NAFTA agreement don’t stop at the negotiating table. Even if Trump is able to hammer out an agreement with Canada and Mexico, he will have to take it to Congress for approval.
Rep. Sander Levin, D-Mich., a member of the House Ways and Means Committee, said Democrats and a number of Republicans will oppose the treaty if labor provisions aren’t strengthened.
Levin said Mexico’s Confederation of Mexican Workers has done little to boost wages there, telling an audience at the Council on Foreign Relations that BMW signed a contract in May with a starting salary of $1.10 an hour, moving up to $2.53 an hour.
“Mexico is a democracy with an authoritarian type of labor structure,” Levin said in an interview. “And they have to end that.”
Another dispute looms with the Trump administration’s push to expand an “America first” policy to government procurement.
In the end, however, the negotiations hinge largely on Trump.
“Ultimately, the key variable difficult to predict is the president himself,” said Christopher Wilson, deputy director of the Mexico Institute at the Wilson Center.
“He has promised a major set of changes to what he has described as the worst agreement ever negotiated, and now it is up to his team to come up with fixes to transform the worst agreement ever into something the president could get behind.”
He added: “It is not easy to see what those changes would be.”