The fourth round of NAFTA re-negotiation, which took place October 11-17, confirmed that Canada, Mexico and the United States remain far apart on several major issues, and forced the three countries to postpone the hoped-for timeframe for reaching a final agreement to the end of the first quarter of 2018.

Following the round, U.S. Trade Representative (USTR) Robert Lighthizer said he has seen “no indication” that Canada and Mexico are willing to make changes that will address U.S. trade deficits, a major objective for President Trump’s administration. The three parties also agreed to postpone the fifth negotiating round to November 16-21.

With a significant portion of proposals now under discussion, there are three broad categories of U.S. proposals on the table:

  1. Updates of issues consistent with longstanding U.S. policy goals. These include many measures that were negotiated in TPP, such as on state-owned enterprises, digital trade, financial services, and intellectual property. While there are likely disagreements within these issues, all three parties recognize the need for a major update.
  2. Revisions to existing NAFTA rules strongly opposed by Canada and Mexico. These include the U.S. proposal to eliminate Chapter 19 dispute settlement for trade remedy disputes, as well as changes to NAFTA’s procurement rules. While these revisions face significant opposition from Canada and Mexico, they are less of an issue for domestic U.S. stakeholders.
  3. Major changes to NAFTA facing significant opposition by U.S. (and North American) businesses (as well as Canada and Mexico). This category of proposals is opposed by many large U.S. companies, and potentially a majority of the Republican-controlled Congress, and includes:
    • The “sunset clause” proposal which would terminate the agreement after five years unless all parties agree to extend the agreement.
    • The introduction of an “opt-in” system for investor-state dispute settlement.
    • Rules of origin for the automobile sector, an increase in the regional content requirement to 85 percent and the introduction of a U.S.-based content requirement of 50 percent. The U.S. auto industry has argued that these high content requirements will incentivize them to opt out of NAFTA, pay the U.S. import tariff (currently at a most-favored-nation rate of 2.5 percent) and source their inputs globally.
    • Rules of origin for the textiles sector, the elimination of “tariff preference levels” from the existing NAFTA, which permit a specified amount of certain non-NAFTA originating yarns and fabrics to be counted as originating inputs. While elimination is supported by U.S. textile manufacturers (as well as potentially members of Congress for whom they represent a constituency), it is opposed by major retailers and the U.S. apparel industry.

Though some progress has been made in the first category of issues, there is currently no clear path forward for the other two. Canada and Mexico have little incentive to move forward substantially on proposals tabled by the Trump administration when they know the proposals are opposed by U.S. domestic industry and the Republican majority in Congress. Many in the business community actively oppose these proposals and view them as “poison pills” for the overall agreement.

Concerns over the substantive proposals have been compounded by President Trump’s statements this month, suggesting that announcement of an intention to withdraw will increase U.S. negotiating leverage. President Trump reportedly said in a meeting with Republican senators on October 24 that triggering withdrawal could be used as a negotiating tactic, and he has made similar comments to the press. Article 2205 of NAFTA permits any NAFTA party to withdraw from the agreement with six months’ notice; how the withdrawal would be implemented if carried out remains an untested legal question.

Announcement of withdrawal would be opposed by agricultural groups, most U.S. industries, as well as a likely majority of the Congress (including even Democrats who would be concerned about the dividing line between executive and congressional authority on trade matters). Many U.S. companies are examining various scenarios for reacting to a U.S. withdrawal from NAFTA, should it occur, including mobilizing Members of Congress to protest the action and devise limits on the President’s ability to act unilaterally.

For companies whose interests may be affected by NAFTA withdrawal, the high levels of uncertainty in the outcomes for the current NAFTA discussions will require continued close monitoring and engagement with appropriate stakeholders. Companies will also wish to evaluate their internal “worst case scenarios” for expected changes in duties and regulations affecting their supply chains in North America, to assess the extent of commercial effects resulting from a U.S. withdrawal.

For more information, contact: Robert Holleyman, Melissa Morris, Evan Yu