The fourth round of the North America Free Trade Agreement (NAFTA) renegotiation talks kicked-off this week and the prospects for reaching some consensus agreement on major NAFTA trade principles by the end of this year are now looking to be rather challenging. Once more, various industry and business interests are growing more worrisome as to U.S. objectives in these talks, as well as their potential implications.
Now 23 years in existence, NAFTA represents a truly interconnected multi-industry supply chain ecosystem of material flows across and within borders. By some accounts, Canada, Mexico, and the United States trade some $1.24 trillion annually, which implies a high level of dependency. Industries such as automotive, apparel, commodities, food, and agriculture have established product value-chain linkages spanning the region.
The third round of the NAFTA talks concluded in late September amid what The Wall Street Journal and other global business media characterized as growing pessimism about the ability of representatives of Canada, Mexico, and the United States to be able to reach consensus on the most contentious tenets of a revised trade agreement by the end of this year. That milestone is especially important from a political dimension since in 2018, Mexico has a presidential election and the United States has its mid-term Congressional elections on the calendar, making a high-level agreement on NAFTA principles more critical to be resolved by the end of this year.
The United States delegation introduced new objectives regarding revised U.S. sourcing content for automobile manufacturing, an alternative means for arbitration of trade disputes other than the existing Chapter 19 process, restricting Canada, and Mexico’s ability to bid on U.S. infrastructure and defense procurement needs along with the introduction of a sunset clause that would force a five-year rolling sunset for the ongoing NAFTA trade pact, unless all three countries agree to renew.
The recent decision by aerospace manufacturer Boeing to challenge the sale of Bombardier’s C-Series aircraft in the United States has kindled a rather negative blowback from Canada and the United Kingdom which is sure to make any changes to existing trade dispute resolution especially sensitive. Britain’s main opposition Labor Party characterized Boeing as the “king of corporate welfare” and accused the U.S. aerospace provider of “egregious hypocrisy.” As we noted in our prior Supply Chain Matters commentary, Bombardier’s C-Series features a globally sourced supply chain network that includes thousands of direct and indirect jobs in Northern Ireland. The existing Chapter 19 clause within NAFTA provides a mechanism to arbitrate trade disputes by an international trade arbitration panel and Canada is likely to insist on its retention. One has to question why U.S. trade officials allowed Boeing to initiate its trade action in the middle of such trade talks.
With legislators and industry trade groups now garnering a clearer picture of the U.S. trade objectives, an intense lobbying effort in underway to blunt such objectives. The President of the U.S. Chamber of Commerce addressed a Mexico City audience this week seeking the cooperation of Mexico’s business leaders in fighting his own government plans to regarding the current U.S. trade objectives. Canada’s Prime Minister Justin Trudeau visited both Washington and Mexico City this week, but all eyes were on statements from Mexico’s President and finance minister indicating that if NAFTA trade talks failed, there is hope for bi-lateral trade negotiations and that Mexico was analyzing possible tariff and import substitution plans.
Likewise, lobbying, and public statements are pitting large U.S. multi-national company interests with those of small and mid-sized businesses in areas related to agriculture, manufacturing, and other trade implications. The WSJ opined earlier this week that where America’s business groups and the Mexican and Canadian governments largely want to strengthen and modernize NAFTA, it is becoming more apparent that the Trump Administration’s goals is to undo some of the trade pact’s core concepts, particularly the notions of three countries operating in a cohesive supply chain framework, rather than three separate networks.
We again re-iterate that industry supply chain teams need to be paying close attention to the remaining rounds of NAFTA trade negotiations along with a posture that talks may well become more contentious in the coming weeks. There appears to be a growing risk that 2018 may lead to trade policies among the three nations reverting to former WTO trade, or possible bi-lateral country trade agreements. Thus, teams need to be addressing various scenarios as to any meaningful implications to existing supply chain cost, tariff or product margin factors.
We can all presume that in the end, the parties can come to various forms of consensus agreements on NAFTA objectives but at this point, the political winds are blowing in opposite directions.
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