NAFTA 2.0: Mexico wants to enhance, not restrict trade

When the United States Trade Representative (USTR) Robert Lighthizer released the U.S. wish list of trade objectives concerning NAFTA 2.0 in mid-July, officials in Mexico exhaled with a sigh of relief.

“Mexico is pleased to see that U.S. is interested in renegotiating the agreement instead of abandoning it,” said Alejandro Rojas, a Mexican Trade Consultant based in Mexico City.

The comprehensive list of American objectives unveiled a softer-than-expected approach to renegotiation of the 23-year-old agreement; namely a desire to keep North America tariff-free.

While that isn’t the case, topping the list of renegotiating objectives was special emphasis on reducing U.S. trade deficits with NAFTA trading partners, Canada and Mexico.

“Since NAFTA was implemented in 1994, the U.S. bilateral goods trade balance with Mexico has gone from a $1.3 billion surplus to a $64 billion deficit in 2016,” states the USTR press release concerning NAFTA negotiations. “Market access issues have arisen in Canada with respect to dairy, wine, grain and other products—barriers that the current agreement is unequipped to address.”

Focusing on trade deficits is a skewed vision in the bigger trilateral trade picture, according to International Trade Expert Jayson Myers.

“You can’t say it’s unfair trade just because you have a trade deficit,” he said. “In fact, if you add in services, the U.S. doesn’t have much of a trade deficit with Mexico at all.”

Rojas agrees.

“Objectives related with reductions of trade deficits are not currently included in NAFTA and this is an issue that can’t be fixed—nor was caused-by the agreement itself,” he said. “This could be a tough subject that has the potential to complicate the negotiations.”

However, Mexican Economy Minister Ildefonso Guajardo is taking a glass half-full approach to the U.S. demands, stating that NAFTA 2.0 is about enhancing trade, not protectionism or paying attention to trade deficits.

“What I have said insistently in my conversations with my colleagues is that we’re delighted to review trade balances provided that we focus on how to improve them by expanding commerce, not by reducing it,” he told Reuters in a July 18 phone interview.

The 18-page manifesto that sets the stage for negotiations that commence August 16 in Washington, D.C, wasn’t as bad as Canadian and Mexican officials were expecting.

Myers said that the U.S. trade objectives can be broken down into three key areas: a laundry list of trade barriers; items that were negotiated in the Trans Pacific Partnership; and three specific issues concerning NAFTA. Those issues are Chapter 19 dispute resolution for trade remedies, rules of origin and access to procurement markets.

The key issue for Mexico will be rules of origin, according to Canada/U.S. Trade Lawyer Mark Warner.

“That’s going to be the big issue for Mexico,” Warner said. “It may not be smart from an economic point of view when you consider the integrated nature of supply chains, but that’s going to be what the U.S. will focus on.”

Myers agrees.

“The U.S. is looking for higher North American and U.S. content. But it’s unclear what that exactly means,” he said. “There’s a possibility for dual rules of origin which could be very problematic for more integrated sectors like auto.”

Another issue that could be problematic is the negotiation timeframe. Faced with a presidential election in 2018 and the potential politicization of negotiations, Mexican officials lobbied for fast-tracked negotiations.

A Reuters report in mid-July stated that all three countries agreed to seven rounds of negotiations that would wrap up by the end of 2017.

“That’s a very aggressive timeframe,” said Warner. “It’s very difficult to see how this can be done in less than a year.”

Myers concurs.

“You have 18 pages of negotiating objectives, clearly this is going to take a long time to negotiate,” he said. “A fast-track timeframe could be problematic.”

However, it could be achievable, if the U.S. administration can get an obvious win.

“The key question will be what will give Donald Trump the ability to hold up a new agreement and declare it’s the best agreement ever,” said Myers. “That will likely come from rules of origin.”

Myers, who spent a week in Mexico City in July talking to Canadian companies doing business in Mexico as well as meeting Mexican trade officials, said that ongoing hyperbole surrounding NAFTA forced officials to do their homework.

“Mexico is very well prepared for the negotiations,” he said. “Officials have clear negotiating objectives and a well thought-out strategy for the negotiations.”

In part, that can be attributed to a solid process for consulting and engaging with the business community and feeding input into the process.

“The Mexicans haven’t focused solely on the U.S., they have studied the Canadian position as well,” Myers said. “They are in a good position heading into negotiations.”

In recent years, Mexico has developed a diversification policy, aimed a curtailing reliance on the U.S. The nation has signed 10 free trade agreements with 45 countries in addition to 32 Reciprocal Investment Promotion and Protection Agreements (RIPPAs) with 33 countries.

The nation’s economic development arm, ProMexico, uses this diversity as a marketing strategy.

“Since it has signed trade agreements in three continents, Mexico is positioned as a gateway to a potential market of over one billion consumers and 60 per cent of world´s GDP,” states the ProMexico web site.

“Mexico has been really focused on increasing exports to markets other than the U.S. as well as increasing investment in Mexico from sources outside the U.S.,” Myers said.

In early June, Mexico signed a deal with the U.S. concerning a very contentious issue – sugar. The sugar industry has been a focal bilateral trade issue between the two countries since NAFTA.

The country agreed to all of the U.S. demands, namely a reduction in exports of refined sugar.

“We definitely gave up a lot,” Juan Cortina Gallardo, the president of Mexico’s Sugar Chamber told the New York Times in early June. “Besides it making sense for the Mexican industry to sign the agreements, it also makes sense for Mexico to finish the agreement in a successful manner because of NAFTA.”

Myers believes that Mexico agreed to U.S. demands to set the tone for NAFTA negotiations.

“Mexico didn’t negotiate a strong agreement on sugar, but wanted to get a deal done and the issue off the table so it could really focus on NAFTA,” he said.

But the country is in a strong position to start NAFTA negotiations.

“At the end of the day, both Canada and Mexico are adopting a ‘ do no harm approach’ to NAFTA negotiations,” Myers said. “Their key objective is don’t erode market access to the U.S.”