Mexico-US Talks Expected to Progress on Rules of Origin and Other Issues

Mexico's economy minister is meeting with U.S. Trade Representative Robert Lighthizer on Aug. 2, and analysts watching the renewed momentum between Mexico and the U.S. in NAFTA discussions see competing pressures on negotiators. On one side is the need to show results for its tariff hikes, on the other is a deep skepticism of trade deals, the observers said. A source close to the negotiations said Mexico and the U.S. are getting closer on reaching a deal on auto rules of origin -- and that Mexico appreciates the other areas where the U.S. is showing more flexibility.

Eric Miller, president of Rideau Potomac Strategy Group, said Mexico now is in more of a hurry, because it would benefit its president-elect if the previous administration has ownership of the deal. He said that if the U.S. retains the investor-state dispute settlement system in NAFTA, and drops its push for seasonal safeguards on agricultural products, and Mexico and the U.S. reach agreement on auto rules of origin, he thinks a deal could come together in August. Miller said that while he thinks the U.S. and Mexico are in a deal-making mode now, he still has a question on whether "some of Lighthizer's views can be overcome enough to reach a deal everyone can live with. Does his audience of one simply tell him to get it done?"

Philip Levy, senior fellow on the global economy at the Chicago Council on Global Affairs, said "the Trump administration is coming under increasing pressure to show results" from the tariffs it's imposed. "Congress is getting restless on the whole thing." Levy served as a senior economic adviser on trade in George W. Bush's White House. Lighthizer testified in the Senate last week (see 1807260029) that reaching an agreement with Mexico would put pressure on Canada to compromise.

Miller said it's important not to make too much of Canadian Foreign Minister Chrystia Freeland's absence this week from Washington. "There have been bilateral dialogues throughout the negotiations," he said. But, at the same time, he said, he thinks Lighthizer has some animus toward Freeland. "But I think any Canadian trade minister that has followed the tack Canada has followed would have run afoul of Lighthizer," Miller said. "Minister Freeland is a very smart, very tough person who will not be pushed around. For her, when you get these guys who try to bully her, she pushes back and digs her heels in." He said it's pretty smart of Canada to try to wear the U.S. down. As the China trade conflict worsens, the administration will want to get NAFTA resolved, he believes.

Early on, it seemed as if the administration wanted to divide and conquer in NAFTA, but favored Canada, since factories have moved to Mexico, not Canada, after the free trade agreement was reached. "Canada and Mexico have taken the view: We either hang together or we hang separately," Miller said, and he doesn't think that the Mexico bilateral talks have really changed the power dynamic. Miller said Mexico and the U.S. reaching a rules-of-origin standard that includes wage credits won't hurt Canada -- but may cause problems for foreign automakers with plants in the South.

Levy said he's never understood what Lighthizer's plan is for getting a majority to ratify NAFTA. He asked whether Lighthizer thinks "because he said something about minimum wage in Mexico, hundreds of Democrats would fall into line?" He also thinks a significant change to rules of origin that would shift more work to middle-class wages would damage the auto industry. "I don't think the president grasps the extent to which Mexico and the U.S. are intertwined" economically, he said.

Even though Miller believes there is movement in the talks, he doesn't think all the issues between Mexico and the U.S. will close in August. He's not sure that Trump wants a deal before November. "My hypothesis is they want to keep NAFTA open until after the mid-terms," he said. "I don't think necessarily that the U.S. and Mexico will have done a deal three weeks from today. But I can easily see a situation where autos is off the table. That's a game-changer."

Levy said he bets there will be no deal with Mexico before November, because if one is reached, Democrats will attack it as not sufficiently favorable to U.S. workers. Now, "nobody can outflank you" as tougher on trade, he said.

If there is a deal in principle with Mexico in the near term, will the U.S. exempt Mexico from auto tariffs and auto parts tariffs, but not Canada, Miller wondered. "Canada's looking for a solution on this," he said. "They think the odds are the U.S. will impose a duty on automobiles."

Miller thinks the Trump administration would rue the day they imposed duties on automobiles, and will further regret doing it before the election. While Miller puts faith in the lobbying power of auto dealers to get Congress to roll back the tariffs, Levy is less sure. He estimated there's only a 40 percent chance Congress would act. Levy agrees that tariffs are coming, and also thinks the tariffs will hit Europe. "I don't buy that the Europeans are exempted from this," he said. "They're exempted for today, for next week," just like Europe and the NAFTA countries were spared the steel and aluminum tariffs for about a month, but then they hit.