Trump shows NAFTA hand

Incendiary rhetoric over a major NAFTA overhaul has died down, but procedural hurdles remain before talks with Mexico and Canada can begin    Turmoil over the North American Free Trade Agreement’s future following Donald Trump’s ascent to the presidency, made possible in part by populist promises to aggressively alter the imbalance of trade with Mexico, appears to be subsiding amid signs the Trump administration is quietly preparing to pursue more modest modifications to the 23-year-old trade deal.
   The change to a more traditional renegotiation of a trilateral trade agreement that all stakeholders agree is ripe for modernization has reassured the business community, especially manufacturers and agriculture producers who depend on the integrated supply chains and export sales that have developed as a result of zero tariffs and other trade preferences bestowed under the economic pact. But actual negotiations with Canada and Mexico are not likely to commence for several months at best, according to trade professionals.
   Freight railroad Kansas City Southern “is confident that the administration has correctly focused on updates and improvements to NAFTA,” the company said in a statement to the Adam Smith Project. “This approach appears to be the path the administration has pursued from the beginning and every indication we see suggests that any update to NAFTA will lead to successful improvements that benefit North American trade.”
   The United States, Mexico and Canada are likely to conclude a framework agreement for renegotiating NAFTA by the middle of next year, U.S. Chamber of Commerce CEO Thomas Donahue predicted Sunday in Mexico City, where he held talks with officials about trade, according to Reuters.
   There is some urgency to wrap up a deal by then because presidential elections are scheduled for July 2018 and leftist candidate Andres Manuel Lopez Obrador is currently leading in the polls. Trump’s harsh rhetoric during and after the presidential campaign about Mexico taking advantage of NAFTA to allegedly steal U.S. manufacturing jobs, the scourge of illegal immigrants from Mexico, and demanding Mexico pay for a 2,000-mile border wall has stirred nationalist sentiment in Mexico. An Obrador victory could lessen chances for upgrading NAFTA because he would not easily make concessions that appear to undermine Mexican sovereignty or submit to Trump’s demands, experts say.
   Trump has threatened high tariffs on Mexican products to bring down the $50 billion trade deficit with Mexico and to withdraw from NAFTA if the agreement can’t be renegotiated on better terms for the United States.
   Current president Enrique Peña Nieto is very unpopular. He can’t run for office again, but his low approval ratings might make it difficult for his centrist Institutional Revolutionary Party to win the election.
   The White House has not yet formally given Congress 90 days’ notice that it intends to begin NAFTA negotiations, as required under 2015 trade promotion authority granted to the president, but Donahue told Reuters he expects that to happen in the coming weeks. That would push the start of talks to late summer, at the earliest. The process gives Congress a chance to weigh in on the changes the United States wants to make to NAFTA.
   The White House last month sent a draft notification letter to Congress, which was subsequently leaked, outlining the administration’s goals for a NAFTA update and soliciting input on setting negotiating priorities. Commerce Secretary Wilbur Ross recently complained that Congress has been slow to engage in drafting a list of principles for NAFTA, but the delay is likely due to the fact that the administration’s pick to be U.S. Trade Representative is not in office yet.

An Obrador victory could lessen chances for upgrading NAFTA because he would not easily make concessions that appear to undermine Mexican sovereignty or submit to Trump’s demands, experts say.

   Trump nominee Robert Lighthizer appears to have bipartisan support in the Senate, but needs a waiver from a U.S. law that prohibits someone from holding the post who has worked on behalf of a foreign government in a trade dispute or negotiation with the United States. Lighthizer once worked on behalf of the Brazilian government in a dispute involving the U.S. ethanol industry, although some question whether the ban applies because the U.S. government wasn’t involved and his work pre-dated enactment of the law.
   Nonetheless, Democrats are holding up the nomination until they get Republican promises to support protections for retired mineworkers who are in danger of losing their private healthcare and pension benefits. Another half-dozen assistant positions at the Office of the U.S. Trade Representative remain unfilled too until Lighthizer is in place.
   Ross, who has influence on trade within the administration, has indicated he wants to informally get the ball rolling because the clock starts ticking on finalizing negotiating objectives once Congress is notified. But Senate Finance and House Ways & Means committee leaders have made clear they will only deal with the U.S. Trade Representative as the executive branch’s statutory interlocutor on trade policy.

   Empty seats. Meanwhile, several levels of policymakers are still missing at the State, Treasury and Commerce departments, all of which play important roles in dealing with foreign governments on trade. One potential reason for the personnel void is that Trump came to office as an inexperienced outsider not expecting to win the election and didn’t hit the ground running with an organizational structure in place for managing personnel and policy decisions.
   Also, many in Trump’s inner circle philosophically believe in smaller government and Trump has publicly questioned the need for nominating hundreds of political bureaucrats. Whether they can accomplish their policy objectives with a small team remains to be seen. The paucity of political appointees makes it more difficult for the government to coalesce on common negotiating principles for NAFTA and engage with foreign counterparts.
   The Lighthizer logjam could be resolved by next week. On Tuesday, the Senate Finance Committee approved a waiver for Lighthizer and then unanimously voted to recommend him to the full Senate. The waiver will be tied to the continuing resolution Congress must pass by the end of the week to keep government funded for the remainder of the fiscal year. Continuing resolutions are short-term measures used when Congress fails to pass appropriations bills for various departments. They typically maintain funding at a rate based on the previous year’s funding. Passage would open the door for a confirmation vote next week.
   “I would think Lighthizer would want to get his teams set up, get his ducks in a row to make sure what the administration wants to do is done in a systematic way,” Doreen Edelman, co-chair of the global business team at law firm Baker Donelson, said.
   Under such a scenario, it’s likely that a formal NAFTA notification won’t be presented to Congress until fall, she added. And that means talks with NAFTA partners may not begin until late this year.
   Others believe consultations with Congress will move faster.
   Acting U.S. Trade Representative Stephen Vaughn, who was formally installed as general counsel and didn’t require Senate confirmation, formally submitted the draft notice to Congress. He has a long-standing relationship with Lighthizer going back to their days at the law firm Skadden Arps representing U.S. companies in alleged cases of unfair trade practices by foreign competitors. Lighthizer will probably only need to apply some minor edits to the draft notification before formally sending it Congress, Welles Orr, senior international trade advisor for Miller & Chevelier, said in an interview. Assuming a quick turnaround, negotiations could start by fall, he said.

Senate Finance and House Ways & Means committee leaders have made clear they will only deal with the U.S. Trade Representative as the executive branch’s statutory interlocutor on trade policy.

   Trump’s NAFTA Roadmap. The U.S. action Monday to impose countervailing duties on Canadian softwood lumber and recent complaints that Canada is making it difficult for U.S. dairy producers to sell milk north of the border demonstrate “that NAFTA has not worked as well as it should,” Ross said at a White House press briefing on Tuesday.
   In its draft notification letter, the White House essentially adopts many of the upgrades the United States negotiated in the Trans-Pacific Partnership agreement, which the public largely perceived as another sellout to multinational corporations so they could outsource more jobs. The TPP was subsequently scuttled in January when Trump canceled U.S. participation.
   During his confirmation hearing last month, Lighthizer signaled that NAFTA needs to be reworked rather than ripped up. He also spoke positively about benefits the TPP would have provided certain U.S. industry sectors and that it could serve as a starting point for NAFTA renegotiation.
   Since 1993, U.S. trade with Canada and Mexico has more than tripled, to $1.3 trillion.
   Business groups broadly agree that NAFTA deserves to be updated to better reflect the realities of today’s modern economy. E-commerce and the domestic petroleum boom due to new fracking technology, for example, did not exist when NAFTA was first negotiated. And many existing chapters on intellectual property rights (IPR) protection, state-owned enterprises, rules of origin, customs procedures, and ensuring trade benefits are available for smaller business are considered outdated, and have been improved in newer trade agreements, such as the TPP. But changes should not include the erection of any new barriers to trade, or disrupt commercial ties resulting from the agreement, industry leaders say.
   The Trump administration said in the draft document that it wants to maintain and expand access for American companies in Mexico and Canada, increase opportunities for textile exports, and reduce or eliminate non-tariff barriers. Another priority is rules of origin that support production and jobs in the United States, with provisions to ensure that preferential duty rates only apply to goods eligible to receive such treatment.
   The document also calls for equalizing sanitary and phytosanitary standards for agricultural goods and making sure any such rules are based on science, and aren’t used as tools to keep out U.S. products.
   Other goals include:

   • Improve collaboration on trade facilitation and trade enforcement
   • Eliminate unnecessary technical barriers to trade
   • Improve IPR standards and enforcement and strengthen measures for compensating rights holders who have been victimized by theft
   • Obtain fairer and more open access for U.S. companies in the service sector, including express delivery
   • Reduce or eliminate barriers to U.S. investment in NAFTA countries, and secure investor rights similar to those in the United States
   • Ensure digital trade is free from customs duties and measures that impede digital trade in goods and services, such as restrictions on data flows and requirements for the establishment of local servers
   • Allow “Buy American” preferences for U.S. government purchasing
   • Increase regulatory transparency and streamline regulations where possible
   • Apply anti-corruption standards
   • Reduce the role of state-owned enterprises in commercial affairs and the amount of state aid they receive
   • Seek greater adoption and enforcement of environmental and labor laws ; eliminate fisheries subsidies

Overall, the document appears similar to what any U.S. administration might seek from talks to upgrade NAFTA. However, the stated goals on trade remedies and dispute settlement could prove controversial.

   Many of the goals overlap with language in the TPP.
   The Trump administration’s informal negotiating principles “reflect a more fulsome understanding of the trading relationships, the importance of thesupply chains, and the seamless market that has been established” between the NAFTA partners, said Paul Ryan, vice president of trade and competitiveness at the Association of Global Automakers, which represents the U.S. subsidiaries of international automakers.
   The objectives “make a lot of sense to us,” Ryan said, and addressing IPR protection, cross-border data flows and other issues in NAFTA “are things we would very much support.”
   Overall, the document appears similar to what any U.S. administration might seek from talks to upgrade NAFTA. However, the stated goals on trade remedies and dispute settlement could prove controversial.
   The Trump administration said it wants safeguard mechanisms to allow a temporary revocation of tariff preferences if increased imports from NAFTA countries are causing substantial injury to domestic industry. And it seeks to eliminate arbitration for anti-dumping and countervailing duty determinations “in light of U.S. experiences where panels have ignored the appropriate standard of review and applicable law, and where aberrant panel decisions have not been effectively reviewed and corrected.”
   Critics say arbitration hasn’t been terribly effective and essentially cedes U.S. sovereignty to an international tribunal. Lighthizer has been very critical of the dispute settlement provisions in NAFTA. Supporters say arbitration is the most effective way to get the three parties together and resolve disputes.
   Now, the question is, what will the Mexican and Canadian governments ask for?