NAFTA talks contentious, but China will be even more difficult

Round 7 of the North American Free Trade Agreement (NAFTA) renegotiations between Canada, Mexico and the US is underway. With tax cuts out of the way, trade will be more important for the Trump Administration in 2018. The worry is that the administration’s ‘America First’ strategy ends in a trade war. The Trump Administration may believe it has a negotiating advantage, and be unwillingness to compromise.

NAFTA will be the first real test of the Trump Administration’s ‘America First’ strategy on trade. And we saw with soft lumber and dairy that ‘America First’ means tariffs. But trade policy is moving forward on several levels. Disputes with China and Europe are likely to rise to prominence in 2018 as well.

My thoughts on the situation follow below, including a video of a segment I dd on CBC’s “On The Money” program.

Contentionious NAFTA Negotiation

Mexico is hosting the 7th round of NAFTA renegotiations. And there is tension both between the US and Canada as well as between the US and Mexico. If we see no breakthroughs here, the goal of reaching agreement by the end of March looks difficult. And that would make it difficult to reach a trilateral deal at all.

US President Trump had planned to meet with Mexican President Enrique Peña Nieto in Washington at some point. But that meeting was dropped after a contentious phone call, during which the two Presidents argued over whether Mexico would pay for a border wall between the two countries.

Meanwhile Peña Nieto faces an election. Therefore, hehas every incentive to reject any deal over a border wall. In the US, midterm elections this year will harden the Trump Administration’s stance as well. Trump has to deliver something tangible on trade to prove he has kept important campaign promises.

The sticking points for the US now are auto rules of origin and the ability to add a five-year sunset clause to an updated NAFTA. Meanwhile, for Canada, the Investor State Trade Dispute is a big issue. Adam Austen, a spokesman for Canadian Foreign Minister Chrystia Freeland says, “we’ve proposed a comprehensive investment chapter with a progressive approach to ISDS building off the CETA.” CETA is short for the Comprehensive Economic and Trade Agreement, a free-trade agreement between Canada, the European Union and its member states.

Bilateral or Trilateral NAFTA agreement with Mexico and Canada

That is a lot to carve out. Canada is not optimistic. Moreover, the Trump Administration is really eyeing China right now. Trump appears likely to move forward with a global tariff on steel and aluminum imports, to penalize China. That is the most draconian of options the Commerce Department outlined for him. And so, actions the US takes with NAFTA are simply a precursor to this.

US President Trump has said he favors bilateral trade agreements. But, so far he has relented and decided to re-negotiate NAFTA on a trilateral basis. If the trilateral talks fail, two-party negotiations could carve out specific sticking points that would allow a re-booted NAFTA to move forward.

However, advocates of a bilateral deal between Canada and the US are emerging, as Americans find trade with Mexico more contentious. US Trade Representative (USTR) Robert Lighthizer may be one. We will have to see how Lighthizer responds in Mexico City. Inflexibility on his part may be a way of abandoning a trilateral agreement as too difficult and moving to bilateral negotiation.

The Toronto Star reported earlier in the month that Canada’s Foreign Affairs Minister Chrystia Freeland and USTR Robert Lighthizer met in secret in Washington. Neither Freeland’s or Lighthizer’s office released details of that meeting. Freeland spokesman Adam Austen described the meeting as “just a bilateral check-in.” That statement leads one to speculate whether Lighthizer is sympathetic to ditching trilateral negotiations.

Whatever happens, US business leaders overwhelmingly favor some sort of deal. 61% believe “withdrawal would have a consequential and unfavourable impact on the US economy.” Watch my comments on NAFTA on CBC from last night here.

China is the next target

As contentious as NAFTA might be, China is where the fireworks may be.

Bloomberg reported on Friday that Trump has told aides that he wants to set a global tariff of 24% on steel imports. He is also considering a 10% tariff on aluminum imports. That’s more than 2.5% higher than the US Commerce Department’s highest tariff recommendation. Allegedly, Trump could go public soon, perhaps during a rally in Pennsylvania ahead of aMarch 13 special election in the state’s 18th Congressional District.

By the way, administration sources told Axios that Trump actually wants a 25% global tariff on steel, not 24%, because it’s “a round number and sounds better.” That gives you a sense of how Trump makes these decisions.

Lighthizer is expected to meet with Liu He, a senior economic adviser to Chinese President Xi Jinping, to discuss these issues this week. That makes him the second member of China’s Politburo to travel to the US this month.

Will it be a trade war?

It seems likely that we will see big tariffs this year. And while I believe there is some wiggle room via bilateral talks for NAFTA, the US is destined for confrontation with its trade partners.

On the campaign trail in 2016, Trump promised to help U.S. coal and steel industries. That helped him win Pennsylvania. So it makes sense that Trump will use the special election on March 13 to fill the open seat in Pennsylvania’s 18th Congressional District as a test case for his ‘America First’ strategy. We should expect some sort an announcement by then.

Bloomberg talks of three options, all of which are protectionist:

• A global tariff on all steel imports of at least 24%.
• A tariff of at least 53% on steel from select countries: China, India and Brazil. Other countries would have imports capped at last year’s level.
• A quota on all steel products equal to 63% of shipments from each country to the US in 2017. And that includes big US allies Canada, South Korea, Mexico and Germany.

Those are the options on the table. So regardless of what happens in NAFTA, we are going to see the Trump Administration put its ‘America First’ trade policy in play. Likely within the month, tariffs are coming. And the EU is already preparing a possible response.