Opening Round NAFTA Fissures Over the Meaning of “Substantial”: What’s the Best and Worst That Can Happen?

by Mish Shedlock, Mish Talk:

Trump is bound and determined to have his way in NAFTA negotiations whether or not anyone agrees with him. Ironically, not even the auto manufacturers do. The first round of negotiations, now underway, has hit a snag already. The meaning of “substantial” is in play.

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The Wall Street Journal reports U.S., Canada and Mexico Wrap Up Nafta First Round.

Opening-round talks to remake the North American Free Trade Agreement revealed early fissures dividing the U.S. from Mexico and Canada, including a Trump administration proposal to require a “substantial” portion of autos and auto parts produced under the pact be made in the U.S.

The renegotiation of the trade deal, which was one of President Donald Trump’s main campaign promises and a key pillar of his “America First” agenda aiming to revive U.S. manufacturing and reduce the country’s trade deficit, is likely to face many hurdles. Auto makers in all three nations generally oppose the stricter rules floated by the U.S. negotiator, and pro-business lawmakers in Congress don’t want to see the pact significantly altered.

Early tensions over areas such as the so-called rules of origin—a major issue for the automotive industry—signaled the tough bargaining that lies ahead as the three nations try to wrap up a deal by early next year.

The chief U.S. negotiator, Robert Lighthizer, came into the talks Wednesday saying the U.S. would insist on tightening the rules of origin, and adding a provision covering U.S. production, an idea quickly dismissed as unworkable by Mexican and Canadian officials.

At this early stage of the talks, it is difficult to measure the depth of the disagreement. Opening rounds generally set the tone and schedule for negotiations. The U.S. has yet to release specifics on some of its most controversial positions, including measures to reduce the U.S. trade deficit, prevent currency manipulation, favor U.S. companies in government contracts, known colloquially as Buy America, and rework rules governing arbitration panels.

The U.S. feels that its most significant leverage in the talks is Mr. Trump’s threat to withdraw from Nafta if the U.S. doesn’t get the changes it wants. North American trade is far more significant to the Canadian and Mexican economies than it is for the U.S.

Mexican negotiators say they are prepared to scrap Nafta rather than accede to demands they consider harmful to their economy.

What’s the Best That Can Happen?

That’s a softball question. The best thing that can possibly happen is the trade talks collapse and Trump backs down on his promise to revoke the deal.

Nearly as good would be minor tweaks that don’t really do anything. One might even argue this is a better alternative as it would allow Trump to save face while bragging about nothing.

What’s the Worst That Can Happen?

The worst is the trade talks collapse, Trump abandons NAFTA and starts a global trade war.

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