Economic Analysis - NAFTA Renegotiation: Fears Likely Overblown - OCT 2017

BMI View: K ey provision s of the North American Free Trade Agreement ( NAFTA ) will likely remain intact foll owing a renegotiation slated to begin in August . While we highlight several potential flashpoints, the objectives laid out by the US prior to the negotiation will be widely acceptable to Mexican officials.

As the US takes a relatively non-confrontational stance, it is becoming increasingly likely that NAFTA will remain largely intact following renegotiations. This outcome will improve sentiment toward the Mexican economy as risks stemming from a major shake-up of US trade policy towards Mexico under President Donald Trump are likely to fade. On July 17, the US Trade Representative (USTR) released its objectives for the renegotiation, which represent a major step back from campaign rhetoric where then candidate Trump called it the "worst trade deal" ever. Many of the goals set by the Trump administration, including clauses surrounding FX manipulation, are non-controversial and will likely be readily accepted by Mexico. We do highlight a few potential points of contention, however, surrounding international arbitration and government procurement. Additionally, we note that the broad scope of the USTR objectives, coupled with their vagueness, suggests that the process of renegotiation will take much longer than the end-of-year target mentioned by US officials.

While rhetoric from the Trump administration and the USTR outline continue to focus on reducing the US's bilateral trade deficit with Mexico, the stated objectives would likely do little to bolster US exports or reduce imports from Mexico. As of 2016, the US trade deficit with Mexico was USD64.4bn, up from USD1.3bn in 1994 when NAFTA was introduced.

Bilateral Trade Deficit Target Of Trump Rhetoric
US, Mexico - Trade In Goods Balance, USDbn
Source: US Census Bureau, BMI

US Position Largely Palatable For Mexico

We expect that the Mexican government will be widely receptive to the objectives laid out by the USTR. While still vague, the outline presented in the document suggests a desire to largely maintain the status quo and contains boilerplate language from other recent US trade agreements, including the Trans-Pacific Partnership (TPP), which is aimed at deeper integration on labour, environment, and other regulatory issues. The list of objectives begins by clearly stating the intent to maintain existing duty-free market access on trade in goods, a step back from campaign rhetoric threatening a return to tariffs on industrial and agricultural goods. This largely aligns with the stated aims of the Mexican government, which, in addition to a primary goal of maintaining unfettered market access, has previously expressed a desire to reuse elements of the scrapped TPP in a NAFTA renegotiation aimed at deeper integration. While the USTR objectives aim to strengthen NAFTA rules of origin, it does not outline new or increased threshold requirements. Additionally, objectives focus on streamlining customs and administrative procedures and facilitating the integration of supply chains, also goals shared by Mexican officials.

Dispute Settlement And Procurement Present Possible Flashpoints

While the US position is broadly non-confrontational, we highlight several areas around which negotiations could break down. The Trump administration's goal to eliminate Chapter 19 of NAFTA would eliminate the current dispute settlement system and allow the US government to pursue anti-dumping measures against Mexico without being subject to international arbitration. Given previous rhetoric and threats of countervailing duties and tariffs from the Trump administration, this will be a concession the Mexican government will be hesitant to make. Additionally, government procurement objectives seek further concessions from Mexico, especially surrounding its state-owned enterprises (SOEs), while at the same time bolstering US protections for sub-national level procurement amid a strong push for further buy America' policies. While this is a big ask, we expect it is unlikely to derail the entire negotiation, but will be watching the rhetoric coming out of both sides closely as negotiations kick off in mid-August.