NAFTA Renegotiations and Elections May Conflict

The issue of NAFTA renegotiations and how they will be affected by elections in both Mexico and the United States is attracting much attention as 2017 comes to an end.  Trade experts and politicians alike agree that it will not be possible for NAFTA renegotiations and elections to run parallel to one another and for negotiators to work on such an important issue while 2018 contests are in full swing.

Antonio Garza, an attorney with the Mexico City law firm of White and Case, is of the opinion that it is improbable that the Mexican, Canadian and US negotiators will reach a consensus on an updated version of the NAFTA before election season starts.  Mexico’s Secretary of Foreign Relations, Luis Videgaray, also believes that it will not be possible to come up with a good trade agreement should talks spill over into the political seasons in both the US and Mexico.  Mexico’s presidential election takes place on July 1, 2018, while the mid-terms in the US will take place next year during the month of November.

Mexico’s Presidential Front Runner Chimes In

Left wing nationalist and populist political candidate, leader of the National Regeneration (MORENA) party, former mayor of Mexico City, and current front runner for the Mexican presidency Manuel Lopez Obrador, or AMLO, as he is also known, believes that NAFTA negotiations and elections cannot take place at the same time and still produce a desirable outcome for all parties.  He also believes that, due to the unpopularity of the current administration led by Enrique Pena Nieto of Mexico’s PRI party, any accord reached before election season begins in his country will have been negotiated from a position of weakness and will lack in legitimacy.  Although he occupies that left side of the political spectrum, Lopez Obrador has stated recently that he is in favor of the NAFTA, but would like to renegotiate it on his own terms should he be elected next July.  In particular, he would like to see changes in the NAFTA made in the sections of the agreement that have to do with agriculture.  Many of the countries farmers were hit especially hard by the terms of the accord.

Party legislator, Norma Rocio Nahle Garcia, believes that since Mexico has gone from an essentially closed economy to one that is “too open” in her opinion, and that citizens should have the right to have their opinions taken into account.  The negotiators from the three nations also fear that NAFTA talks could become a “political punching” bag should the talks carry over into election season.  Although US officials would like to see to it that NAFTA renegotiations and elections do not conflict, they also feel that it is highly improbable that anything definitive will be accomplished by the end of the year.  Publicly they have stated their hope that a renegotiated deal can be sealed by the end of the first quarter of 2018.

Nafta Renegotiations and Elections: In a hurry to get the job done

During the November round of negotiations and during talks to be held during the first quarter of next year, the Trump administration will be in a hurry to get something done.   In their public comments, members of Trump’s team “have made it abundantly clear that they would rather deal with NAFTA before Lopez Obrador starts delivering his nationalist and populist message every day on the campaign stump.” Furthermore, any negotiations following the Mexican election would also take place during the five month lame-duck period in Mexico before a new government takes office.    This would make the process even more nettlesome.  Additionally, the US mid-term elections, which would take place during the aforementioned lame-duck period, would result in a further complication of the process.

For the most part, experts on international trade feel that, no matter what the time frame is, the NAFTA will be renegotiated.   Even though Trump has heavily criticized the treaty and blamed it for a US $62 billion trade deficit with Mexico, while the trade deficit with China for 2016 was $347 billion, the accord has been the source of a tripling of trade between the NAFTA countries since its inception in 1994.  Most of the US trade deficit with Mexico results from trade within the automotive industry.  The US agricultural sector has a trade surplus with its NAFTA partner.

We are confident that the Trump administration will not pull out of the accord, even though threats to do so have been made.  Although Trump blames the North American Free Trade Agreement for the closing of manufacturing facilities located throughout the US’ heartland, he also realizes that the trade pact has been good for the nation’s farmers.  These rural voters supported the then candidate’s campaign, and now support his presidency.

Most likely, a deal will be made that redefines the rules of origin requirements for vehicles made in North America.  In the eyes of the Trump administration the current figure of 62.5% is too low.  The US negotiating team is pushing for 85%.  In the end, however, it is probable that the three parties will split the difference and establish rules of origin for the automotive industry that are somewhere in the 70% – 75% range.

More time will be necessary

Because NAFTA renegotiations and elections will most likely coincide, we believe that the talks will be complete at some time during the 2019 calendar year.  Although there will be a degree of uncertainty during the period prior to complete renegotiation, companies will still make the choice to establish manufacturing facilities in Mexico due to the large differential in the wages of American and Mexican workers.

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