NAFTA Talks on ‘Thin Ice’

June 12, 2018 Updated: June 12, 2018    

WASHINGTON—A deal on the North American Free Trade Agreement (NAFTA) looks uncertain as Canada resists U.S. demands for major changes, such as a sunset clause. And with looming political headwinds, further delays will make it even more challenging to renew the 24-year-old pact.

One of the sticking points in negotiations is the sunset clause.

The United States wants to add a clause specifying that the agreement expires after five years unless the three countries agree to extend it, thus requiring the trading partners to reexamine it every five years. Businesses, however, warn that such a move would hurt long-term investments by increasing uncertainty.

Before departing the Group of Seven (G7) summit on June 9, President Donald Trump told reporters, “We’re pretty close on the sunset provision,” adding that it is one of the heavily negotiated clauses.

“You have one group that likes to have five years, and then a renegotiation at the end of five years. And you have another group that wants longer because of the investments,” Trump said.

During the summit, Trump held a bilateral meeting with Canadian Prime Minister Justin Trudeau and said both leaders had a “very, very good meeting on NAFTA.”

Trudeau, however, opposes a sunset clause “of any length” claiming that having an expiry date on a trade deal would make it “not actually a trade deal.”

“That’s our unequivocal position,” the prime minister said on June 9 during a press conference after the summit in Charlevoix, Quebec.

Trudeau said there is no real need for a sunset clause, as the existing NAFTA already has an exit clause and any country can quit on a six months’ notice.

Deal Breaker

The Trudeau government views the five-year sunset clause as a deal breaker, according to the Canadian press. In addition, U.S. tariffs on Canadian steel and aluminum are hurting the chances of Washington and Ottawa reaching a deal anytime soon.

A week before the summit, Trump imposed tariffs on steel and aluminum imported from Canada, Mexico, and the European Union.

Trudeau called Trump’s tariffs “illegal and unacceptable” and said that Canada would impose equivalent counter-measures, effective July 1.

“As Canadians, we are polite, we’re reasonable, but also we will not be pushed around,” Trudeau said during the press conference.

The prime minister’s comments evoked a strong response from Trump, who called Trudeau “very dishonest” and “weak.”

White House trade adviser Peter Navarro blamed Canada for the delays in finalizing a new agreement.

“We’d have a great deal with NAFTA by now if the Canadians would spend more time at the bargaining table and less time lobbying Capitol Hill, and our press and state governments here,” Navarro said on June 10 in an interview on “Fox News Sunday.”

After the rocky G7 summit, Canada’s Foreign Affairs Minister Chrystia Freeland said on June 10 that the negotiations would continue and that she would be visiting Washington on June 13.

She and U.S. Trade Representative Robert Lighthizer had a constructive phone conversation about NAFTA and the steel and aluminum tariffs, according to a Wall Street Journal report.

Despite rising tensions between the United States and Canada, Freeland told reporters that she remained optimistic about reaching a deal on a revamped NAFTA.

Canadian Foreign Affairs minister Chrystia Freeland (L) looks on as U.S. Trade Representative Robert Lighthizer speaks to the press at the closing of the NAFTA meetings in Montreal, Quebec on Jan. 29, 2018. (PETER MCCABE/AFP/Getty Images)

The Trump administration launched in May a new investigation on auto imports that could lead to new U.S. tariffs similar to those imposed on steel and aluminum.

The Trump administration believes the United States has the upper hand in negotiations, and hence it uses tariffs as a bargaining chip.

“If a deal isn’t made, that would be a very bad thing for Canada and it would be a very bad thing for Mexico,” said Trump. “For the United States, frankly, it would be a good thing.”

Political Headwinds

If the NAFTA renegotiations continue to see delays, it will be harder to reach a deal due to the upcoming midterm congressional elections in the United States and the presidential election in Mexico.

Approval by the current Republican-controlled Congress may be on “thin ice,” if a deal takes too long, Lighthizer warned on May 1 at a U.S. Chamber of Commerce event.

In addition, Mexico’s presidential election will take place on July 1. A potential change in leadership, especially to left-leaning, populist candidate Andrés Manuel López Obrador, could have a serious impact on the renegotiations. Obrador said he would change Mexico’s approach if an agreement is not reached prior to his election.

NAFTA, signed by the United States, Canada, and Mexico, entered into force on Jan. 1, 1994. Trump denounced the agreement as a bad deal for the United States and vowed to overhaul its terms. Talks to revamp NAFTA began in August 2017.

Last year, the U.S. goods trade deficits with Mexico and Canada were $71.1 billion and $17.5 billion, respectively.

The trade imbalance would change, Trump said during the press conference in Canada. “They have no choice. If it’s not going to change, we’re not going to trade with them.”

If the parties fail to reach a three-way deal, Trump said that he is open to bilateral trade agreements with both Canada and Mexico.

“Two things can happen on NAFTA. We’ll either leave it the way it is as a threesome deal” and “change it very substantially,” Trump said. “[Or] we’re going to make a deal directly with Canada, directly with Mexico.”