Trade Observers Fear Trump May Pull Out of NAFTA Negotiations

Import/Export

As of Monday, December 4, 2017

With little progress in the last negotiating round for the North American Free Trade Agreement, trade experts believe it is becoming more likely that President Trump will follow through on his threat to withdraw from the talks.

Right now, Trump is turning all his attention to getting a tax-reform bill wrapped up by the end of the year. So he is backing off on his threats.

But when NAFTA negotiators meet in Montreal for the sixth round, scheduled for Jan. 23–28, Trump could start playing hardball if he doesn’t get what he wants and step back from the bargaining table.

“The temperature for a withdrawal has been ratcheted down the last few weeks, and we can expect the same until the end of the year because of the desire by the president and Congress to pass tax cuts,” said Josh Teitelbaum with the Washington, D.C., law firm Akin Gump Strauss Hauer & Feld. Teitelbaum was speaking about NAFTA during a Nov. 29 webinar organized by the U.S. Fashion Industry Association, a Washington, D.C., trade group that represents apparel importers and retailers. “At this point, the affirmation is that it is more likely than not that he will issue a withdrawal notice.”

A withdrawal from NAFTA would set in motion a six-month timeline to end the free-trade agreement, which went into effect in 1994. Trump’s threat to end NAFTA could fire up Canada and Mexico—the two other members of the free-trade accord—to come to the table and accept some of the U.S. demands that have been most extreme for the Mexican auto industry.

With negotiations on a roller coaster, Mexico and Canada have decided to diversify their trading options. Mexican trade officials have been visiting China to open up a trade door with the economic powerhouse, and the country is still planning to remain in the Trans-Pacific Partnership trade agreement with 10 other countries. Trump officially withdrew the United States as a TPP member this year after years of negotiations.

Canada recently signed a free-trade pact with the European Union. “They are both saying we are cutting deals with other people as a way to reduce the impact of a potential NAFTA termination,” said Teitelbaum, a former deputy assistant secretary of commerce for textiles, consumer goods and materials in the U.S. Department of Commerce.

Currently, NAFTA meetings are scheduled through February or March of next year even though all three countries originally had hoped to conclude negotiations by the end of this year. Mexico is eager to wrap up trade talks because presidential elections are scheduled for July 1. Right now, the favored presidential candidate is Andrés Manuel López Obrador from the left-wing PRD party. López Obrador has been taking advantage of an anti-Trump sentiment in Mexico that only gets worse as the U.S. president bashes our southern neighbor.

Talks around textiles

Issues around the apparel and textile industry haven’t changed much in the last couple of rounds. During the meeting in Mexico City in mid-November, apparel and textiles negotiators met early in the round but didn’t make much headway.

However, during the September round, U.S. trade negotiators proposed eliminating TPLs, or trade preference levels, an idea long supported by the U.S. textile industry, whose products are widely used in Mexico because of NAFTA.

TPLs allow for a certain amount of yarn and fabric produced outside the free-trade-agreement area to be used in apparel production as long as the non-regional inputs are cut and sewn within the free-trade countries.

Overall, Mexico and Canada combined are permitted to ship nearly 236 million square-meter equivalents (SME) of apparel, made-ups and fabric and 12.8 million kilograms of yarn containing third-party components.

This allows some fabrics to come in from places such as China, Vietnam and South Korea.

Instead of TPLs, U.S. trade negotiators have proposed allowing a short-supply list of fabric and inputs not manufactured in the region to be implemented. This kind of short-supply list is already used in the Dominican Republic–Central America Free Trade Agreement.

The short-supply list does not cap the quantity of fabric or inputs that can be brought in to the region, but it is more restrictive and has specific details on the exact fiber count for yarns and additional descriptions and classifications for fabric.

Mexico is entirely opposed to eliminating TPLs and, in fact, would like to expand the TPLs to bring in more foreign-made fabrics and input for apparel production.

Other negotiating sticking points include whether there should be a sunset clause for NAFTA, meaning that the free-trade agreement would automatically expire after five years unless all three partners agreed to renew it. Mexico supports periodically reviewing the trade accord but does not want to see it abruptly end after five years.

But the hottest issue right now in NAFTA is centered around the automobile industry. The United States wants to see autos made in Mexico have at least 50 percent input from U.S. materials and 85 percent input from regional materials coming from Canada, the United States and Mexico.

Under the current rule, cars only need to have 62.5 percent of their materials coming from the region, which doesn’t have to include the United States if the materials come from Mexico or Canada or both. “Canada and Mexico are rejecting the U.S. proposal outright for automobiles. They believe it is on the outside of the reasonable bounds of trade policy,” Teitelbaum said.