What NAFTA talks mean for U. S.
Renegotiation set to begin, but what is Trump looking for?
A possible redo of a massive trade deal that could affect consumer prices and move jobs across the U. S. borders is set to begin.
The Trump administration formally told Congress Thursday it intends to renegotiate the North American Free Trade Agreement with Canada and Mexico.
U. S. Trade Representative Robert Lighthizer sent a letter to congressional leaders, starting 90 days of consultations with lawmakers over how to revamp the pact. Talks with Canada and Mexico can begin after that.
The two- page letter offered few details about what changes the administration would seek in the 23- year- old pact President Trump has called “a disaster.”
Trump, once a harsh critic of NAFTA, has changed his mind and wants to renegotiate it with the U. S. partner nations. Established in 1994 by the U. S., Canada and Mexico, it created a free trade zone in North America by eliminating most tariffs and encouraging the unimpeded flow of products many economists say has benefited its member nations. American farmers have mostly benefited from the reduction in trade barriers. But the pact encouraged American manufacturers to relocate some operations to Mexico to take advantage of cheaper labor there, so critics blame NAFTA for wiping out U. S. factory jobs.
Lighthizer, confirmed by the Senate last week, and Commerce Secretary Wilbur Ross will head the negotiating team.
In his campaign, Trump railed against the dangers of running a high trade deficit. And his NAFTA negotiations likely will focus on measures that aim to cut the deficit, says Monica de Bolle, senior fellow at the Peterson Institute for International Economics.
Renegotiation of NAFTA could have varying degrees of consequences. Higher import taxes could raise prices of consumer goods. Protectionist measures by the U. S. may trigger retaliatory actions that could hurt U. S. exporters’ sales and lead to job cuts.
“If these negotiations break down and Trump tosses out NAFTA ... there would be a massive disruption to North American commerce, and supply chains would have to reorganize,” says Douglas Irwin, a trade economics professor at Dartmouth College. “And consumers would see final prices rise on everything from avocados to SUVs.”
The administration had circulated a
draft letter on NAFTA. Thursday’s version had fewer specifics. Here are some parts of NAFTA that may be renegotiated based on earlier drafts of the letter:
Rules of origin. Trump wants to revise the “rules of origin,” which he believes cause too many parts from non-NAFTA countries to come into the U. S. tax- free. Companies that make goods with certain percentages of components ( parts and labor) bought in the NAFTA region can sell them in NAFTA countries “duty- free,” or without paying a tax at the border of destination countries.
For example, a Ford sedan with at least 62.5% of components sourced in the NAFTA countries can be exported to Canada without Ford paying a Canadian duty. The auto industry is concerned. Revising the rules — say, by raising the North- American- parts- percentage requirement to 70% from 62.5% — could disrupt the supply chain it has built in Mexico, says Kristin Dziczek, director of the Industry, Labor & Economics Group at the Center for Automotive Research. Having to use new suppliers likely would mean automakers would be forced to pay more and these additional costs would be passed on to customers.
Government contracts. A NAFTA rule about government contracts likely will be addressed to favor American businesses.
Currently, NAFTA requires its member governments to consider suppliers from other NAFTA countries in infrastructure projects. In other words, the U. S. government must treat Mexican and Canadian companies no less favorably than domestic firms.
But Trump’s insistence that the U. S. government prefer bids from American suppliers could trigger similar policy from Canada and Mexico. That would limit American companies’ business opportunities for Canadian and Mexican government contracts. It also could drive up costs for the U. S. government if it has to choose from a smaller base of suppliers made of only domestic companies and not consider cheaper pricing from Mexican or Canadian competitors.
Import tax. The Trump administration says it will seek “to level the playing field on tax treatment.” Canada and Mexico currently impose the socalled value- added taxes ( VAT) for most goods, including imports. It’s similar to sales taxes in the U. S. But unlike U. S. sales taxes, the value- added taxes in Canada and Mexico are levied by their central governments. Trump’s team could be assessing options on a similar type of tax, analysts say.
If the U. S. imposes an import tax, U. S. consumers likely would pay more for goods from Canada and Mexico.
Non-tariff barriers. Trump’s team wants to eliminate any non- tariff barriers to U. S. exports, citing permit and licensing requirements and quotas as examples. His team will press Canada and Mexico to eliminate “all export subsidies on agricultural products.” The issue came to light when Trump criticized Canada’s system for its dairy industry that allows the government to control the supply of milk products, set prices and impose tariffs on some imports.