By Stephen Lande
On the 1st of July, voters in Mexico will go to polls to elect a new president. Both the Mexican and U.S. governments should emphasize the importance of completing at least the substance of a new NAFTA agreement before then.
The Obrador Factor
The danger is that without a full or substantive agreement in place before the end of April or early May at the latest, negotiations will take an electoral hiatus. If the current, left-wing front runner, Manuel López Obrador, popularly known as AMLO wins, the considerable progress that has already been made in the negotiations will be lost.
He is the candidate who is most skeptical of NAFTA since he supports more self-sufficiency in agriculture by cutting imports from the U.S., and reducing foreign investment in the energy sector. The likelihood of AMLO becoming the next president of Mexico is increasing since the other two candidates are poised to split the opposition vote. Even if one of the two pro-NAFTA candidates – Ricardo Anaya Cortés for the PAN (National Action Party) and José Antonio Meade Kuribreña for the PRI (Institutional Revolutionary Party) were to drop out, AMLO, might still be the winner. All he needs is a plurality. Mexico does not require a runoff. It is also worth noting that AMLO is running as an outsider, and we seem to be living in the age of outsiders. It is outsiders who have been the most recent winners in India, the United States, and France, and they have done extremely well in other European elections, most recently in Germany and Italy.
An AMLO win in the July election in Mexico, however, would not necessarily mean the end of NAFTA. He has not said he would tear it up. If there was a completed agreement in place or even only an agreement on substancewhen he takes office, AMLO may decide to go with it. After all, he will have a host of other priorities for reform in Mexico, and he may not want to get bogged down. It is worth remembering that President Bill Clinton pushed only for cosmetic changes in the original NAFTA, which had been negotiated by his predecessor, the first President Bush – even though in the previous election, he had expressed many misgivings about the draft agreement. In addition, the dislocation brought on by the current renegotiation would only continue and possibly intensify.
On the other hand, if major elements of the revised NAFTA are still unsettled in July, AMLO may want them to reflect his left-wing views. To say the least, those positions would complicate an already difficult negotiation. And even if an agreement under those circumstances were possible, it would probably be less expansionist than the current agreement or the modernized agreement now being negotiated.
Steel and Aluminum Announcement
Any inordinate delay in a negotiation is fraught with danger, as with wine making or mackerel, waiting too long could result in vinegar or stinking fish. Note what happened to the Free Trade Agreement of the Americas and the Doha Round last century and the TPP last year.
The longer the negotiations drag on, the greater the possibility that there will be an intervening event that will prevent a successful conclusion. For example, until last week, there was no question that momentum was building towards an agreement. Then came an announcement on steel and aluminum restrictions which would have a serious impact on Canada. The current indication is that the announcement will not prove fatal to the NAFTA talks since President Trump and his United States Trade Representative (USTR), Ambassador Lighthizer, have indicated that Canada and Mexico would be exempt from restrictions if the modernization negotiations were completed in a few months. In fact, in a strange way this deadline may move the negotiations forward. However, the longer one waits, the greater the chance that an exogenous matter will intervene and derail the process.
Also, the President is under pressure to either conclude the negotiations successfully or withdraw from the agreement. More than one year has elapsed since he assumed office, and he has not yet acted on his electoral commitment to either leave or fix NAFTA. Since the new president of Mexico will not formally assume office until later in 2018 and because it will take time for him and his team to gear up for negotiations, negotiations are not likely to resume until sometime in 2019. Given President Trump’s temperament, it is doubtful that negotiations will be allowed to extend into a third year.
Leave It to The Negotiators
The suggestion here is that, currently, it is best to leave the negotiations to the negotiators. An agreement appears to be within reach, especially between Mexico and the United States. One should not be misled by negotiating statements emphasizing the remaining differences, the slow progress, and the unwillingness of the other NAFTA countries to offer meaningful concessions. This is normal negotiator talk to keep the pressure on the other side to make concessions in the final phases of negotiations.
These tendencies are reinforced by the Trump method of negotiating through attention getting tweets. Although one does not know whether they are part of an overall strategy or simply a whim of the moment, one positive result of the tweeting is that the President demonstrates toughness to his supporters while allowing his negotiators to be flexible.
In point of fact, the negotiators have been the heroes of the day. They were faced with a highly charged political atmosphere at the launch of the negotiations. NAFTA had been widely and strongly criticized, particularly U.S. concessions to Mexico. In the United States, withdrawing from NAFTA was an element in President Trump’s election campaign in 2016, and one frequently mentioned by the President since.
Lighthizer’s Good Work
In this regard, the role of Ambassador Lighthizer should be recognized. Despite having his hands full with a full trade policy agenda, going well beyond NAFTA, he has been able to focus on the NAFTA negotiations. This is even more amazing when one considers that as a result of delays in Congressional approvals of his deputies, he has been forced to operate the agency virtually alone. In the circumstances, he was fortunate that the USTR staff is considered among the most professional and hard-working in Washington, but a large amount of credit is due to the managerial ability of Ambassador Lighthizer himself.
Originally an outsider to the Trump team, he now has the confidence of the President. This may be crucial to concluding the negotiations ¬ when Presidential support of the final package will be critical. If Lighthizer believes the deal meets the campaign criteria for a renegotiated NAFTA, there is a solid chance the President will accept his assessment. Also, Presidential intervention may be required either to sell a compromise to hard-liner Trump supporters or to pressure Mexico or Canada into making final concessions.
The U.S. Private Sector
The private sector – particularly the trade associations – also deserve credit. America’s withdrawal from TPP led to the expectation that it was only a matter of time when NAFTA would be next. The Administration’s statements blaming U.S. job losses on NAFTA suggested that it might be. In short, NAFTA was on life support, with only the smallest chance of recovery. Yet since President Trump’s assumption of office, political support for NAFTA has increased significantly. This is due in large part to the private sector which, by focusing on NAFTA’s constituents in key states, has made everyone – the public and the politicians – aware of the serious dislocations that would follow quickly on the heels of a U.S. withdrawal from NAFTA.
A Guide for Success
It would help now if America’s private sector could shift its focus. So far, the major business groupshave focused on demonstrating the advantages of NAFTA. They have been particularly successful in border and agricultural states, where Trump’s support is strong and withdrawal from NAFTA could undermine his prospects for reelection.
The private sector’s priority now should be urging the Administration to complete the negotiations quickly and getting an agreement in place before the Mexican election. If not, and if the current front runner wins, one of two outcomes appears likely. One is that the differing positions of Presidents AMLO and Trump will make negotiating a modernized agreement impossible. The other is that they cobble together an alternative, new agreement. Such and agreement, however, would inevitably be at a much lower degree of ambition than that which seems possible today.
The building blocks for a successful negotiation are in place. The well-considered negotiating strategy laid out by the lead negotiators, have seen steady progress, notwithstanding the political rhetoric. The negotiators have kept their eyes on the ball. They have moved toward completion of the less disputed chapters and ironed out many of the issues in the more difficult ones. Where the original objective was “do no harm” in the NAFTA negotiations, they have reached the point where a truly improved NAFTA now seems within reach.
This does not mean that successful renegotiations are assured. There is still strong opposition to staying in NAFTA both within the White House and among core Trump constituents. Indeed, recent changes within the White House may have dampened the prospects for a deal.
As for the President, he has yet to move on from his campaign position that “NAFTA’s a horrible deal; we’re renegotiating it. I may terminate NAFTA, I may not – we’ll see what happens. … Any renegotiation must provide a better deal for our workers and companies.” This means the question is still open.
Thus, the private sector’s support for a timely and successful conclusion of negotiations is particularly important. Those in the Administration who argue that NAFTA modernization will meet the President’s goals to make NAFTA more effective in promoting manufacturing and US employment must be reinforced. The challenge for the private sector, of course, is how to support the Administration’s effort to conclude the negotiations while continuing to fight those Administration proposals they oppose.
A three-prong approach is suggested. In some areas – automotive rules of origin and a sunset clause for example – Canada and Mexico can be relied upon to take the same line as the strongest U.S. business groups. There are other issues, however, issues which are not deal breakers for Mexico and Canada, where the positions of the U.S. government and America’s leading private sector groups are still far apart. These include U.S. proposals to opt out of investor state dispute settlement (ISDS) and some government procurement obligations.
A second prong could be areas where the U.S. private sector should recognize that there are some issues where the Mexican and Canadian governments will accede to U.S. positions which the U.S. private sector opposes. The major U.S. trade associations and their members should recognize that they cannot win on all the issues under discussion and my lose on these. Although they should continue to advocate for their positions, they must send the clear signal that failure to achieve all their goals will not prevent them from supporting a timely conclusion of the agreement.
A third prong could be labor. It is not clear how hard the U.S. will push for reforms of Mexican labor practices. If the U.S. makes changes in Mexican labor practices a make-or-break issue, the private sector should refrain from involving itself in those negotiations.
This may be the time for trade associations and their members to begin considering where they may have to compromise and the best way to alleviate the deleterious impact of measures they oppose. At least in private, they might consider fallbacks, including compromises and alternative measures. For example, a possible fallback for the absence of U.S. to allow third-party arbitration in investor-state disputes could be unilateral Mexican and Canadian commitments to allow such cases to be considered by the World Bank’s arbitration bodies.
Again, the U.S. private sector may have to accept some disappointments, but that would be a small price to pay for getting the NAFTA talks essentially wrapped up in a timely fashion. And who knows: as Lighthizer claims, a compromise on investor-state and labor might bring some added Democratic votes in support of a revised NAFTA. That would be a welcome change from the current situation, where trade bills either pass by the narrowest of votes or languish in legislative limbo because of the partisan divide.
I have not said much about Canada’s role in these negotiations. For the U.S., the talks with Canada are every bit as tough or may even be tougher as the negotiations with Mexico.
US access for dairy exports into Canada and trade remedy arbitration are the best examples of intractable U.S.-Canada issues. But the timeline is not so unforgiving since the U.S.-Canada FTA will continue in effect even if the U.S. withdraws from NAFTA. Let me be clear. I am not advocating this position, but, at the end of the day, it may be necessary.
It would be foolish to just assume that the NAFTA negotiators will in fact manage the kind of success they need. Failure is always a possibility. So, we are left with the adage: “where there’s a will, there’s a way”. Personally, I think the will is there. As for the way, that is not clear yet. It is the job of the negotiators to find it. However, chances of the final agreement being accepted will be strengthened by strong private support of their efforts even if there are cases where private sector demands are not met.
Stephen Lande is the President of Manchester Trade. A former U.S. Foreign Service Officer, he has been involved in international trade since the 1960, was the first Assistant USTR and served as chief bilateral US trade negotiator in the Office of the U.S. Trade Representative.