The moment of truth arrives for Nafta negotiations

Crunch time has arrived for the future of the North American Free Trade Agreement (Nafta) between the US, Canada and Mexico. Negotiations, scheduled to begin on August 16, are expected to drag on well into 2018, instead of wrapping up this year as hoped, and they will be fraught, with consequences for FDI in all three countries.

Pulling out of Nafta was a key plank in US president Donald Trump’s election campaign. Yet from farms and factories in states Mr Trump won easily, supporters rose up en masse to defend Nafta and the new export markets it has created for their products in Mexico, Canada and beyond.

Staying power

“Since Nafta was approved, agricultural exports to Mexico have nearly doubled. US exports of agricultural products to Canada have increased 44%. American farmers can’t afford to lose access to these markets,” the American Soybean Association submitted in a statement typical of many growers.

The North American Meat Institute agreed. “Nafta has played a central role in boosting incomes for millions of US farmers, ranchers, meat and poultry processors, allied manufacturers, and packing and transportation companies,” the institute stressed in a statement.

Automobile makers and the aerospace industry and their suppliers point to the seamlessly integrated supply chains they have created during the 23 years Nafta has been in force, in which a single component may cross national borders multiple times during assembly of a final product. They fear that disrupting those supply chains could wipe out thousands of US jobs.

Mutual benefits

Not surprisingly, Nafta has also had a profound effect on FDI, especially in the manufacturing sector. According to the Office of the US Trade Representative (USTR), US companies invested $352bn in Canada in 2015, and Canada invested $269bn in the US. In the same period, US FDI into Mexico totalled $92.8bn, while Mexico invested $16.6bn in the US, and Canada invested $11.4bn in Mexico.

That is why multinationals in all three countries breathed sighs of relief when Republican lawmakers were forced to withdraw their proposed ‘border adjustment tax’ on imports into the US. With the tax issue out of the way, the USTR’s negotiating objectives will include “elimination of unfair subsidies, market-distorting practices by state-owned enterprises” and intellectual property issues, especially digital rights. A particularly thorny topic is certain to be dispute settlement mechanisms, on which Canada and the US have diverging views.

Some experts predict that Mexico would be particularly vulnerable to a slump in FDI if Nafta negotiations fail; however, in the first quarter of 2017, FDI into Mexico increased to $7.9bn, half of which came from the US.

A market in itself

“I am pretty bullish about Mexico’s ability to retain and attract FDI,” says Antonio Ortiz-Mena, who worked on Nafta negotiations for the Mexican government and is now a senior adviser at Albright Stonebridge Group in Washington, DC. “Mexico is no longer seen by the outside world as simply a production site for re-exportation to third countries. Companies are now seeing Mexico as an important market in itself.”

However, Mr Ortiz-Mena does not see much wiggle room on a crucial issue: the discrepancy between wages and labour standards in Mexico and those in the US and Canada. Many Americans – especially Trump supporters – believe Mexico’s low wages directly caused massive job losses as US production moved south of the border to take advantage of low wages.

“Mexico does not want to compete on the basis of wages, and they are only one factor that companies consider when investing,” Mr Ortiz-Mena responds. “Productivity in Mexico has not risen as much as we would like, and to increase wages you need to increase productivity.”

Nevertheless, the powerful UAW Union insists that “meaningful standards with strong enforcement mechanisms must be in place before a renegotiated Nafta could take effect, or in the alternative, tariffs should be placed on non-complying countries until compliance can be proven.” And the USTR’s final objectives include establishing minimum wages and bringing tougher, internationally recognised labour standards into the core of the treaty, as well as stricter environmental obligations. 

Alejandro Gomez-Strozzi, a trade and foreign investment expert in the Mexico City office of Texas law firm Gardere Wynne Sewell, says the focus of the negotiations should be to allow each country to build on its own strengths – including its wage structure – while working toward the common goal of strengthening the competitiveness of industries within the Nafta region.

Mr Gomez says Mr Trump’s goal of bringing back manufacturing to the US is not doable in the short to medium term, and that investors take a long view. “Mexico’s advantages are not going away,” he says.

Rival positions

Kristin Dziczek, an expert in industry economics with the Michigan-based Center for Automotive Research, also believes Mexico is in a strong position, partly because of an inflow of investment in new automotive modern plants and free-trade agreements with 44 other countries.

“It’s not just a low-cost producer; it’s an export base,” she says.

On the other hand, John W Boscariol, who heads the international trade and investment group at Toronto-based law firm McCarthy Tetrault, thinks Canada is in a stronger Nafta negotiating position than Mexico. He believes talks with Mexico are more likely to fail because of US concerns about wages and labour laws in its southern neighbour.

“There’s a much better context for Canada,” says Mr Boscariol. “At the end of the day, once you go through the Nafta negotiation, Mexico will be more likely to be hurt. We have the same labour and employment, economic level and crossborder investment as the US. I think we will come out of it relatively unscathed and will be positioned better than any other country in the world to access the US market.”

Meanwhile, as talks progress in an atmosphere also soured by disputes with the US over steel, aluminium, Canadian softwood lumber and dairy products, citizens of each country have reason to be concerned about the direction they may take, and the unpredictable nature of the final decision by the US president. n