By Carolyn Salzer and Jason Tolliver
Trade representatives, Canadian Prime Minister Justin Trudeau, Mexican President Enrique Pena Nieto, and U.S. President Donald Trump, began meeting August 16th to renegotiate the North American Free Trade Agreement (NAFTA). It’ll be a tall task to successfully wrap up negotiations by early 2018 to avoid bumping up against the Mexican presidential elections in July (as all parties are hoping). Whatever does eventually emerge from the proposed seven rounds of talks will ripple through the economy and industrial market. More than a third of U.S. exports flow to Canada and Mexico and the U.S. Chamber of Commerce estimates that 14 million American jobs depend on trade with NAFTA partners. Trade among the three nations has quadrupled since the agreement took effect in 1994, surpassing $1.1 trillion in 2016. As cross-border trade flows have increased, so too has the need for additional warehouse and distribution space. Since NAFTA took effect, U.S. warehouse stock has grown by 3.5 billion square feet.
The U.S. Trade Representative outlined its objectives for NAFTA renegotiation in a 17-page document that identified, among other things, reducing the trade deficit with Mexico, tightening “rules of origin” which dictate how much of a good’s (like cars and auto parts) content must come from within the trade bloc, modernizing the agreement to include eCommerce, and eliminating the current trade dispute mechanism (Chapter 19) that allows companies to appeal decisions by domestic courts to a binational panel that renders binding decisions on illegal subsidies and dumping – that’s when a country exports a product at prices lower than what is charged in the domestic market. Key sticking points between Mexico and the U.S. will be provisions aimed at reducing the roughly $60-billion trade gap, with Mexico fi
ercely opposing any proposal to add tariffs to goods moving across the border. Elimination of the Chapter 19 trade dispute mechanism will be a hot button issue for Canada, which views its elimination as a deal breaker.
During the campaign, President Trump was quite vocal about his distaste for the agreement calling it “the worst trade deal in the history of the country.” U.S. trade negotiators will attempt to extract enough concessions from Mexico and Canada to allow President Trump to declare victory to a core component of his base while not upsetting business backers who have lobbied heavily to preserve the agreement. Retaining unfettered access to the U.S. market, which accounts for roughly three-quarters of Canadian exports or 20% of the country’s economic output, will be a key objective for Prime Minister Trudeau’s delegation. Meanwhile, Mexican President Enrique Pena Nieto’s representatives must balance the demands of the U.S. with the need to not appear weak at home heading into a presidential election.
What to expect
Expect to see a lively bout full of policy positions and political jabs, but don’t expect substantial changes to the agreement by the end of 2017. Modernizing NAFTA in a serious way will take years and any agreement reached must be approved by the legislative bodies in each country. In the meantime, we’ll be sitting ringside watching closely.
To take a deeper dive on trade, check out our recent topical report The Impact of Trade Policy on the Industrial Market.
Carolyn Salzer, Industrial Analyst for the Americas, and Jason Tolliver, Head of Industrial Research, Americas