Business Anxiety Rises as NAFTA Trade talks Restart. In Mexico, a new round of negotiations on NAFTA begins today: the North American Free Trade Convention. According to President Trump, that is the worst trade treaty ever, but what exactly is the problem?
NAFTA came into force in 1994 and is a treaty between Mexico, the US, and Canada. The purpose of NAFTA is to promote trade on the continent by removing trade barriers.
The treaty eliminated most import and export rates between the three countries. As a result, it has become cheaper to trade with each other.
Mexico Benefits:
Sounds fine, you would think. However, the current government in Washington is thinking about it differently. The treaty would significantly increase the trade deficit with Mexico. In 2016, the US imported $ 64 billion more from Mexico than it exported to that country. According to Trump, that indicates that NAFTA benefits the Mexicans especially.
According to President Trump, the treaty has closed thousands of factories in the US, and millions of Americans lost their jobs, mainly to cheap Mexican forces.
Two Options
So there are two options left for the US: renegotiate or refer to the trash can. For the time being, the first option is chosen. But what exactly do the Americans want?
In general, Trump remains extremely vague in his statements about NAFTA what he wants to achieve exactly. Nevertheless, a letter was published in May detailing the most important US requirements.
Import levy?
Trump said earlier that he would consider introducing a 20% import levy on goods from Mexico, but that is not the official starting point of the negotiations. The idea behind such an import tax is, moreover, that it becomes more expensive to export from Mexico; which makes it relatively cheaper to produce in the US.
The government Trump cites in the official letter with no word about import charges. In fact, it is rightly advocated to maintain tax-free trade between states. This is also the starting point of a free trade treaty.
However, the US complains that it is suffering from unfair subsidies, market disruption by state-owned companies and intellectual property restrictions. So what has to be done?
Market Access
Who gets exactly “unfair subsidies” and what state-owned companies Trump are thorny is nowhere explicitly mentioned in the demands of the Americans.
However, there is a longer disagreement over the subsidization of the Canadian dairy industry, which causes US companies in the sector to suffer from a competitive disadvantage. It is obvious that Americans want to do something about it.
Which state-owned companies operate unfairly according to the Americans, is also not clear from the letter. However, it is clear that America wants state-owned companies not to discriminate with who they are doing business. The US wants government companies to make commercial considerations and thus not choose a particular business to do business because that company is Mexican or Canadian.
Mexican Energy Sector
This would enable the US to target the Mexican energy sector, where two major state-owned companies control most of the market. Nevertheless, in recent years, there has been a lot of changes in this area: Mexicans amended the constitution in 2014, allowing other players to enter the market.
The US energy sector could now benefit greatly from NAFTA; now they can work with, for example, the construction of pipelines in Mexico. If NAFTA would fall, this will be much more expensive because there will be import and export taxes again.
ISDS, Again
As with any free trade treaty that has been hassled in recent years, the Arbitration Court is also a problem with NAFTA. As for the Americans in any case.
The government Trump claims that the entire investor-state dispute settlement (ISDS) system is under way. ISDS is a clause in the treaty that allows private investors to charge states outside the normal legal system in some specific cases.
What Now?
This round of negotiations lasts until September 5th, but then the Americans need to be somewhat constructive. The Mexican Foreign Minister has announced that he should immediately leave the negotiating table if the Americans threaten to tear down NAFTA completely.
The US Secretary of Commerce said earlier that he is pushing for a new deal in January.