Experts Disagree on Likely NAFTA Resolution

Now that it is seemingly too late for Congress to ratify a new NAFTA in December (see 1805110025), predictions about what happens next vary widely. Treasury Secretary Stephen Mnuchin said on CNBC that the administration could pursue a "skinny NAFTA," and a Republican senator suggested that would be the best course of action, though a full rewrite is still preferred, Mnuchin said.

Eric Miller, president of Rideau Potomac Strategy Group, a political advisory firm, said it's not surprising that the NAFTA negotiations haven't concluded in the timeline the administration wanted (see 1805180023). "I think fundamentally, the strategy from the get-go was destined in some respects to fail, because it misread the partners that they were negotiating with," he said. He said not only did the Office of the U.S. Trade Representative go in with a lengthy list of demands, the office didn't even acknowledge how difficult some of their asks were for the other countries, which also have to deal with the politics of the trade deal.

Miller said U.S. Trade Representative Robert Lighthizer approached NAFTA the same way he did Japan in the 1980s: "We will take our stick and we will beat our opponents into a pulp until they yield." Mexico and Canada have not reacted with hostility, said Philip Levy, senior fellow on the global economy at the Chicago Council on Global Affairs. "I think the prime imperative for both Mexico and Canada is: Don’t prompt anyone to press the detonate button. No matter how outrageous the proposal, [say]: 'Let’s talk about this some more.' You don’t storm off."

A NAFTA deal slipped out of the Americans' hands because they didn't give up some of their demands when Mexicans started to move toward accepting a wage standard for auto work, Miller believes. "The Mexicans were willing to make a deal; not to accept the US proposal," but they could agree to a rules-of-origin quota where 20 percent of the components were made by workers earning $16 an hour or more. But, he said, they weren't going to do that in isolation, in a skinny deal. Mexican negotiators "did not want to make a major concession here and then come back later and have to make a major concession on sunset or [investor-state dispute settlement, known as] ISDS," Miller said. "This is a problem of not managing the end game properly. When people are ready to make concessions they have to know what they’re going to get for it and what they’re not going to have to give up."

Even though Miller believes USTR has mishandled NAFTA, he thinks that a NAFTA 2.0 will be achieved, and it will contain populist elements, such as encouraging more auto work to be done at developed country wages. He thinks this will happen because a Democratic majority in the House will prioritize Mexican wage convergence over almost everything else, and will accept preserving ISDS. The election of Andrés Manuel López Obrador also will help, he said, as the lead candidate for the Mexican presidency said during a debate on Sunday, "You can’t have a trade agreement where U.S. workers are making 10 times what Mexican workers are and have it be fair."

Levy is much more pessimistic. He said he does not think Lighthizer will agree to enough concessions to get Mexico and Canada to settle on a new NAFTA, and even if he did, he doesn't think there's a populist rewrite that could get through Congress. "Is this better for the Democrats as an issue, or is there a viable NAFTA deal they really want?" Levy said he may be cynical, but he thinks Democratic politicians -- and the labor unions they rely on for turn-out-the-vote efforts -- find NAFTA "better as an issue than a solution."

Voters that identify as Democrats view free trade more favorably than do Republicans, he said, but the labor unions' messaging is very much aligned with the president's argument that NAFTA decimated the industrial base. And, Levy said, wage standards for rules of origin, even if they were to go beyond autos to other sectors, are not going to bring back pre-1992 levels of manufacturing employment. He believes unions would want to rewrite Mexican labor law -- and that Republicans who might otherwise support NAFTA 2.0 would resist what they'd see as a back-door attempt to rewrite U.S. labor law.

Levy thinks the current NAFTA will stay in force for years but isn't sure whether Mexico and Canada will be spared the Section 232 tariffs on steel and aluminum as negotiations continue at the technical levels. "It would be nothing more than a coin flip to give you an answer," he said. He thinks that's the rational move, but will it be what President Donald Trump does? "They do have the problem of being a fundamentally impatient administration that has done nothing to cultivate patience with their supporters," he said.