The U.S.’s take on NAFTA

Written by: Anthony M. Troia, GTM Consulting, U.S.

 As an update to previous articles tracking the U.S. trade policy shift with respect to the North American Free Trade Agreement (NAFTA) (see: U.S. Trade Policy Shift, by Philip Sutter) it appears that, instead of outright repealing the agreement, the new U.S. administration is taking a much more measured approach.

To be certain, changes are coming. Recently, the nature of these changes, has become a bit clearer with respect to at least two key questions:

What kind of changes will the U.S. go after? And, what kind of timeline are we looking at?

The following are the latest developments that are shaping the future of NAFTA, from a U.S. perspective.

Hints of the U.S. agenda for NAFTA changes

First, it’s clear that the Administration’s looking at some heavy revisions to the existing agreement, rather than outright repeal. U.S. Commerce Secretary, Wilbur Ross, tasked by President Trump to assist in the negotiations with Canada and Mexico, has made it clear that “there’s a lot to fix”.

Specifically, Secretary Ross has stated in a Bloomberg broadcast interview “[t]here were some things in [the original] that were missed. There were things in it that were not done correctly to begin with. And a lot of things that might have been OK back then but don’t work now. So there’s a lot to fix … Several chapters need to be added because of the digital economy and other things that have developed subsequently”.  According to Ross, he hopes to add entire new chapters to the existing 22 chapters to reflect the “modern digital economy”.

He also hinted at substantive changes to auto parts. According to a Canadian Press article, Ross has made no secret of his desire to adjust the rules of origin for tariff-free vehicles in order to bring auto-parts production closer to home.  Also indicative of the substantive degree of revisions being contemplated, but not yet detailed publicly, is the fact that Ross has indicated Congress will be involved.

It remains unclear whether his intended target in such a wide sweeping rules change will be limited to Asian parts suppliers, or whether Mexican and Canadian suppliers will also be hit.  Also still unclear and open for consideration is whether the final deal will involve a three country treaty or two bilateral agreements.

The U.S.’s NAFTA renegotiation timeframe

With respect to the initial concerns over the possibility of abrupt changes that could have adverse effects on supply chains, it may be somewhat encouraging to U.S. importers and manufacturers that the Administration seems to be cognizant of such an impact of substantive changes to NAFTA. Based on some stated contingencies, Ross made it clear that any “real” negotiations won’t happen until the latter part of this year, with an estimate – seemingly optimistic – that such negotiations “won’t take more than a year”.

The recently appointed United States Trade Representative (USTR) will be the legally designated point of contact with the U.S. Congress, and will initiate the statutorily required 90-day consultative process with the legislature. The necessity to involve Congress in the process indicates the substantive changes that will require Congressional approval for “fast-track” legislation to proceed.

Ross also indicated that, with respect to timing, he’s at least acknowledging such significant changes to the auto vehicle and parts manufacturers create a scenario where those companies “might need some time to adapt” and may be considering a phase-in period so that auto manufacturers can adjust their global supply chains accordingly. The supply chain concerns of the auto manufacturers have been a major factor as a reaction to the early rhetoric of President Trump’s tough talk on trade agreements.

Left to speculation…

In conclusion, although many questions and uncertainty remain, it appears that these developments provide some insight that the U.S. administration is at least aware of the real impact that changes to NAFTA will bring. What remains to be seen, and is not being discussed yet, is the degree to which importers and manufacturers – particularly with respect to the automobile manufacturers – will be involved in the future renegotiations.

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