Renegotiating NAFTA: What Happens Next?

Gary Clyde Hufbauer (PIIE) and Euijin Jung (PIIE)

March 14, 2017 1:15 PM

President Donald Trump is expected to notify Congress in the next few weeks that the administration intends to renegotiate the North America Free Trade Agreement (NAFTA), and to disclose its priorities. But because a slew of preliminary steps must occur before a renegotiation can start, the administration has also stated that it does not expect formal negotiations to begin until much later this year.

The timeline for opening the long-awaited process promised by Trump during the 2016 campaign was signaled by Secretary of Commerce Wilbur Ross in a joint press conference with Mexico’s Economy Minister Ildefonso Guajardo. Earlier, in anticipation of talks with Washington, Mexico began consultations with its own domestic industries, and Canada will soon do the same.

During and after the presidential campaign, Trump threatened to withdraw from NAFTA or to impose a 35 percent across-the-board tariff on imports from Mexico. Under existing statutes, the president has ample authority to take both actions. Consequently the administration might drop broad hints as to its powers at the negotiating table, so as to elicit better offers from Mexico and Canada (for details on presidential authority, see Hufbauer 2016).  

Several procedural and legal steps must occur for the administration to launch the NAFTA renegotiations.

Chapter 22 of NAFTA allows all three members to modify the agreement, and any member can withdraw after giving six months’ written notice to the others. Article 2202 Amendments states that:

  1. The Parties may agree on any modification of or addition to this Agreement.
  2. When so agreed, and approved in accordance with the applicable legal procedures of each Party, a modification or addition shall constitute an integral part of this Agreement.

Enacted on June 24, 2015, US Trade Promotion Authority (TPA) sets forth procedures that the administration must follow in renegotiating NAFTA. TPA (also called “fast track” because it paves the way for an up-or-down vote in Congress without amendments) is the expedited process by which Congress enacts legislation to implement trade agreements negotiated by the president. TPA requires the administration to declare US negotiating objectives, and to notify and consult with Congress before and during trade negotiations. The TPA law remains in effect until July 1, 2021, unless Congress disapproves an extension of TPA in the 60-day period prior to July 1, 2018.

Under TPA, the president submits written notification to Congress at least 90 days before initiating negotiations with Mexico and Canada (or any other country), the step that Secretary Ross has committed to take. The notification should announce the date when renegotiation talks will start, and list specific modifications or additions to the NAFTA text.

The administration’s specific negotiating objectives are not yet known. But, a few of them were revealed during statements by Trump and interviews with other officials. First, Trump clearly wants the negotiations to deliver a reduction in Mexico’s trade surplus with the United States.  Economists dismiss such a negotiating objective as managed trade rather than free trade. The US trade deficit with Mexico increased from $21 billion in 2000 to $58 billion in 2015, an imbalance that can be curtailed in only two ways: by reducing US imports from Mexico, or by expanding US exports to Mexico, or both together. Historically, trade agreements between market economy nations have liberalized market access in both directions, without promising a trade balance outcome.1 Trump’s goal represents a major departure from traditional norms and will not be easy to achieve.

Second, the Trump administration wants to strengthen so-called “rules of origin,” particularly in auto parts, in order to boost US auto production. Rules of origin typically specify the percentage of value of imported goods that must originate within the three NAFTA countries in order for the shipment to qualify for duty free treatment when crossing a NAFTA border. Currently, 62.5 percent by value of the parts in a car assembled in Mexico must originate in NAFTA for the car to enter the United States tariff free. The Trump administration wants to raise this percentage and in other ways modify the rules so that more autos and parts sold in the United States will be made in the United States. 

Third, in his remarks, Secretary Ross mentioned a new chapter covering the digital economy. Although Ross did not provide details, he might consider Chapter 14 Electronic Commerce in the Trans-Pacific Partnership (TPP) agreement as a template. The TPP electronic commerce chapter commits member states to liberalize crossborder flows of information and data, and in other ways promote the growth of digital trade in goods and services.

When it comes, the president’s notification of intent to negotiate will give the Congress at least 90 days to review the administration’s plans. Consultations normally take place with the House Ways and Means Committee and the Senate Finance Committee, and specifically each committee’s Congressional Advisory Groups (CAGs) on Negotiation. The CAGs are the House Advisory Group on Negotiation and the Senate Advisory Group on Negotiation. The House Advisory Group comprises the chairman and ranking member of the Committee on Ways and Means, and three additional members of that committee. Similar membership rules apply to the Senate Advisory Group on Negotiations, centered around the Committee on Finance. CAG members normally take the lead in reviewing and writing implementing legislation that carries out a trade agreement. Upon the request of a majority of CAG members, the president must meet with them either before or during the negotiations. Also, the administration must assess the impact of US tariff changes on agricultural and textile and apparel products, and hold special consultations with several committees on import-sensitive products in agriculture, fisheries, and textiles and apparel.2

While still consulting with Congress, and 30 days before commencing negotiations with Mexico and Canada, the administration is required to disclose to the public a detailed and comprehensive summary of its specific negotiating objectives, and describe how to achieve those objectives and how they benefit the United States. It is not clear how much the public disclosure will differ from detailed plans laid out in congressional consultations. The public information will be posted, prior to the start of negotiations, on the website of the US Trade Representative, but key objectives will almost certainly be leaked from Congress before then.

Once the notification, consultation, and publication requirements have been met, the administration can formally commence the renegotiation of NAFTA. Meanwhile, Mexico and Canada will undertake their own preparations. Extensive informal talks between the three countries will no doubt be held prior to formal negotiations. Ross has said that NAFTA could be negotiated either as two separate bilateral deals or as a trilateral deal. Mexico and Canada advocate trilateral talks, probably thinking that their ability to withstand US demands will be greater in a trilateral setting.  

Moreover, Ross stated that the administration will take its time with consultations before commencing “real” negotiations with Mexico and Canada. According to Ross, formal negotiations will probably not begin until late in 2017. Meanwhile, the Trump administration will pressure Mexico and Canada with tough talk, hoping that the NAFTA partners will become more amenable to making concessions once they reach the negotiating table. Starting this informal process, Ross has already talked about “softening up” the NAFTA partners, and observed that “if people know you have the big bazooka, you probably don’t have to use it,” implying that Trump can threaten unilateral tariffs if Mexico and Canada do not offer adequate concessions.

Notes

1. Between 1960 and 1990, the Soviet Union frequently negotiated trade agreements within the bloc and with sympathetic partners (such as China and India) that contained bilateral trade volume and trade balance targets.   

2. Committees that should be involved in consultations with the president include the Committee on Ways and Means and the Committee on Agriculture in the House of Representatives; and the Committee on Finance, the Committee on Agriculture, Nutrition, and Forestry, and the Committee on Commerce, Science, and Transportation in the Senate.  

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