To Keep NAFTA Humming, Keep Talk of Steel Out

The 7th round of negotiations on the North American Free Trade Agreement (NAFTA) wrapped up early this week, and ended on a relatively positive note.  There was a noticeable change in tone in the joint press conference with USTR Lighthizer, Minister Freeland and Secretary Guajardo, which NAFTA watchers certainly must have noticed.

The first striking detail was actually something that was omitted. Though Lighthizer did say that the two major goals of the administration were to update and rebalance the deal, he didn’t once utter the phrase trade deficit. Instead, he highlighted discouraging outsourcing, likely referring to the U.S. proposals to eliminate the controversial Chapter 11 on investor-state dispute settlement (ISDS); strengthening rules of origin by increasing the content of North American inputs in automobile manufacturing; and adjusting the rules on government procurement, through a “more balanced” dollar-for-dollar procurement market. It should come as no surprise that he is still pushing in these areas, as there is much left to negotiate, and concessions on these issues will not likely be settled until the final rounds of the agreement take shape.

So far, the three countries have closed a total of 6 out of 30 chapters, most recently finishing the chapters on Good Regulatory Practices, Administration and Publication, and Sanitary and Phytosanitary Measures. Though the three ministers all stressed the importance of timing, considering the upcoming Presidential elections in Mexico, as well as mid-term elections in the U.S., Freeland made clear that Canada would not be satisfied with just any deal. Lighthizer seemed to suggest this as well, but said that while the U.S. preferred a tripartite agreement, he would conclude bilaterals, if necessary. This light jibe is in line with previous reports that Lighthizer thinks the talks are moving a lot more smoothly with Mexico than with Canada.

The overall positive tone was only briefly interrupted when Freeland addressed President Trump’s announcement last week that he would impose a 25% tariff on steel and 10% tariff on aluminum imports. She reiterated the message from her official statement that any tariffs on Canada would be “entirely inappropriate.” A comment on this was to be expected, not least because Canada would be the country most affected by the administration’s actions. In fact, a December 2017 report by the International Trade Administration noted that Canada leads in steel imports to the U.S., making up 16% of total imports. The Canadian and U.S. steel sectors are also highly integrated, with 50% of all American steel exports destined for Canada.

What remained unacknowledged, however, were recent comments by President Trump that the tariffs would be tied to satisfactory progress on the NAFTA negotiations. The three ministers seemed to signal that they prefer to keep the discussion on steel tariffs separate from NAFTA. This would be wise. First, linking the Section 232 actions to NAFTA undermines the overall national security argument put forward by the administration, as it is now being used by the president as a bargaining chip. Second, it would run counter to the spirit of NAFTA, which is of three neighbors working together to increase North American competitiveness. The Department of Defense even expressed its concern “about the negative impact on our key allies” that the steel and aluminum tariffs would bring about. Third, linking this issue to the ongoing negotiations could seriously threaten to derail the talks, which the administration simply cannot afford due to its tight negotiating timeline.

While the NAFTA negotiations have had their ups and downs in seven successive rounds, it is important to keep in mind that things can change very quickly. In Monday’s press conference Freeland, addressing Lighthizer, said “I think we’re becoming friends.” Let’s not upset the progress we’ve made so far on NAFTA, as well as the friends we’ve made along the way, and keep steel out of the discussions.

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