NAFTA On Hold

After an intensive period of negotiations in 2017 and early 2018, NAFTA is now on hold, pending the outcome of the upcoming U.S. midterm elections.

In an interview aired on Sunday, July 1, 2018, U.S. President Donald Trump said he wants to wait until after November’s midterm elections before moving ahead with a new NAFTA agreement.

Probably the most contentious of issues is the so-called “sunset clause” proposal by the U.S., which would cause any renegotiated NAFTA to expire after five years unless the NAFTA parties agreed to renew it.

When negotiations resume, the three NAFTA parties will be confronted with a number of issues where agreement has so far proved elusive. Probably the most contentious of these is the so-called “sunset clause” proposal by the U.S., which would cause any renegotiated NAFTA to expire after five years unless the NAFTA parties agreed to renew it. Canada and Mexico have stated they will not accept this proposal. Other yet-to-be settled issues the parties will have to discuss when negotiations resume include:

• Automotive rules of origin—Under existing rules of origin, automobiles must be made up of between 60% and 62.5% NAFTA-originating content in order to benefit from tariff exemptions. The U.S. has proposed increasing this number to 85%, including 50% U.S. content.
• Review of final anti-dumping and countervailing duty determinations under Chapter 19—The U.S. has proposed to eliminate Chapter 19, while Canada and Mexico seek to preserve it.
• Government procurement—The U.S. has proposed limiting the other NAFTA parties’ access to government procurement contracts to the dollar value of procurement contracts that U.S. companies receive from governments in Canada and Mexico. Canada and Mexico oppose this limit.

The U.S. has threatened to further escalate by imposing tariffs as high as 25% on imports of automobiles from Canada.

In the meantime, Canada and the U.S. have engaged in an escalating tit-for-tat over trade tariffs. As has been widely reported, on May 31, the U.S. imposed tariffs of 25% on steel imports and 10% on aluminum imports from Canada, the EU and Mexico. On July 1, Canadian retaliatory tariffs, between 10% to 25%, came into effect on $16.6 billion worth of U.S. goods, including steel and aluminum, and also a wide-range of other goods such as ketchup, gherkins, orange juice and maple syrup.

The U.S. has threatened to further escalate by imposing tariffs as high as 25% on imports of automobiles from Canada. If these tariffs are imposed, it is not yet clear whether they will impact only completed vehicles crossing the border, or whether they will also impact individual auto components each time they cross the border (the North American automobile supply chain is so integrated that some components cross borders several times before being installed into a vehicle).

In other developments, Mexico elected Andrés Manuel López Obrador as its new President on July 1. Mr. López Obrador has said he will maintain the course in NAFTA renegotiations set by this predecessor Enrique Peña Nieto. However, he will not take office until December. Combined with November’s midterm elections in the U.S., this renders it very likely that a renegotiated NAFTA will not be in place until sometime in 2019.