NAFTA renegotiation set to start on 16 August but agreement by early 2018 appears unlikely

President Peña Nieto at the National Palace in Mexico City on 17 July 2017.

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The renegotiation process will involve representatives from Canada, Mexico, and the United States, and according to media reports the parties involved have agreed to divide the talks into seven rounds, with the first round scheduled to start on 16 August in Washington DC. The decision to start the renegotiation process comes shortly after the US government unveiled on 17 July its North American Free Trade Agreement (NAFTA) renegotiation priorities. The document, published by the Office of the United States Trade Representative (USTR), reiterates US president Donald Trump's ambition of reducing the US trade deficit (the US had a USD64-billion trade deficit with Mexico in 2016) and protect American jobs.

The main negotiating principles of the US administration will include the elimination of what the US considers as unfair subsidies, market-distorting practices committed by state-run companies, and intellectual property restrictions. Some of the US renegotiation priorities by important sectors include:

• Maintaining reciprocal duty-free market access for Industrial goods and Agriculture, and duty-free market access (reciprocity not mentioned) for US textiles.
• Negotiating the adjustment period for the US import of sensitive agricultural products.
• Promoting regulatory compatibilities and eliminating non-tariff barriers to trade.
• Improve enforcement of existent Sanitary and Phytosanitary measures.
• Improve existent standards and transparency related to customs laws, regulations, and procedures.
• Update and strengthen rules of origin while incentivising the use of US goods and materials.
• Incorporate labour and environmental provisions into the core of the agreement.
• Revise the existent dispute settlement mechanism (chapter 19) and address anti-corruption measures and trade-related issues on subjects such as investment, intellectual property, digital economy, small and medium-sized enterprises, state-run firms, telecommunications, and financial services.

Implications for Mexico

Out of the three NAFTA members, Mexico has the most at stake as over 80% of its exports are destined to the US. Mexico's management of the renegotiation and its outcome will therefore have implications across all sectors of its economy, shaping its future regulatory and trade environment but also affecting within the one-year outlook the ruling Institutional Revolutionary Party (Partido Revolucionario Institucional: PRI)'s ability to win the 2018 presidential election (see Mexico: 19 January 2017: Mexico's management of its US relationship to define ruling PRI's ability to stay in power beyond 2018).

Mexican authorities and business groups remain cautious following the release of the USTR document, particularly in the context of Trump previously threatening to withdraw from the agreement and impose a unilateral 35% tariff on Mexican imports. However, Economics Minister Ildefonso Guajardo has welcomed the technical tone of the USTR document while emphasising that it recognises the importance of free trade among the NAFTA countries. Indeed, the US negotiating stance leaves aside the inclusion of controversial issues such as the imposition of trade quotas, and includes many provisions seeking to automate trade, speed up regulatory and customs processes, increase transparency, and create mechanisms to reduce certain barriers to trade among stakeholders. Such views have also been echoed by Mexican business groups. On 19 July, for example, the president of the Mexican Confederation of Business Chambers (Confederación de Cámaras Industriales: CONCAMIN), Manuel Herrera Vega, stated that the US initial negotiating stance had been "less radical than expected".

However, there are many areas where Mexico will likely encounter differences with its US counterparts as the principle of wanting to reduce the US deficit with Mexico continues to be a priority of the Trump administration. The Mexican national director of Trade and Customs, Israel Morales, has stated that the Mexican maquila industry (manufacturing) could be one of the most affected sectors given that it contributes the most to the US trade deficit with Mexico. The Mexican negotiators are also likely to put a tough stance with regards to the revision of existent rules of origin, particularly if the negotiations concentrate on Mexico's auto and auto-parts sectors (likely, given than Trump has pressured auto firms to relocate to the US from Mexico, although not mentioned in the USTR document). Another point of contention will be the desire to revise and potentially eliminate the current dispute settlement mechanism featured in NAFTA's chapter 19. The US desire to include labour and environmental-related issues in the core of the renegotiated agreement is also likely to be contentious as it could potentially lead to US negotiators wanting to protect their industries by demanding, particularly when it comes to labour, the strengthening of labour rights and standards in Mexico.

Outlook and implications

The government of President Enrique Peña Nieto favours the swift renegotiation of the agreement and is hoping that these would be completed by early 2018, prior to the start of the electoral campaign for the July 2018 Mexican presidential election. The fact that both the US and Mexico successfully resolved a sugar trade-related dispute in June 2017 sets a good precedent for the renegotiations, but the revamping of an entire trade agreement, which also includes Canada, is likely to be more complicated. Trade negotiations are highly technical and typically take years, even when countries are negotiating on cordial terms. Any potential diplomatic dispute emerging (over issues such as the construction of a US-Mexico border wall or the need to defend Mexican sovereignty against its protectionist northern neighbour) is like to add additional pressure on the NAFTA negotiators, further complicating talks and increasing the probability of delays to any agreement. The longer it takes to renegotiate NAFTA, the greater the economic uncertainty that it will generate in Mexico. This could potentially lead to companies putting investments on hold until the new trade environment is clarified and halt job creation in certain parts of Mexico. A protracted renegotiation process is likely to hurt the PRI politically, granting left-wing presidential candidate Andrés Manuel López Obrador an opportunity to criticise the government and further strengthening his electoral appeal (particularly if Trump criticises Mexico) as the 2018 Mexican presidential election approaches.