NAFTA 2.0, so far....

With no shortage of global chaos drawing our attention these days, not the least of which is North Korea, you may not have been paying attention to the fact that the second round of NAFTA 2.0 talks

The Three Amigos 2.0?

wrapped up in Mexico City this past weekend. Complex negotiations like the NAFTA 2.0 have a fascinating set of dynamics worthy of study in their own right. You don't just show up in a hotel conference room, sit down with your counterparts, and begin hashing out an agreement. Negotiations are dynamic, sometimes unpredictable situations. All sides can be hyper-prepared with their briefings, position papers, and demands. But once negotiations are formally underway, all bets about the precise outcome are off. Everything from the shape of the bargaining table, to the actual process by which parties negotiate, and, of course, the personalities of the negotiators themselves, is pivotal to the outcome. Indeed, it is frequently the case that negotiations seem doomed just before an agreement is struck.


Ice Breakers and Bluffs

I was reminded recently of a several tactical events in past negotiations that give a flavor for the ways in which all parties try to get advantage and shape the outcome. In December 1987, President Reagan DiMaggio brought with him a baseball that he hoped to have signed by Reagan and Gorbachev. That ball found its way into the negotiating room where Reagan asked Gorbachev to sign it. As interpreters for both leaders conveyed the symbolism of signing, it became an important ice-breaker between the two men as they embarked on delicate nuclear arms negotiations.

The Gipper in Action

and Soviet General Secretary Mikhail Gorbachev met for nuclear arms negotiations in Washington, DC. Joe DiMaggio, the American baseball great, was invited to attend as one of the many dignitaries to attend a White House dinner to mark the occasion.

Closer to the NAFTA talks, I was reminded of a bizarre episode that took place in the middle of a round of Canada-U.S. Free Trade negotiations being held at a resort hotel in Quebec. The chief negotiators for both countries, respectively for Canada Simon Reisman and for the United States, Peter Murphy, could not have been more different. Reisman was a grisled, veteran of many trade disputes with the U.S., Murphy a much younger, but tough former textiles negotiator with little direct experience with Canada. Launched in 1985, the Canada-U.S. FTA negotiations entered their most difficult, time-sensitive phase in mid-1987. In an effort to ease some tensions and build a little camaraderie between the negotiating teams, everyone took a time out to play a game of slow-pitch softball. Rather than having the Canadians and Americans square off against one another, the sides were mixed together. As Michael Hart, Bill Dymond, and Colin Robertson recount in their book about the negotiations, the baseball game was designed, in part, to give the media something to report on; nerdy trade-policy WONKS playing baseball. Less clear is the impact the game had on the negotiations themselves, but it was a clear effort by both sides to alter the negotiating dynamics by moving the teams into a less formal setting where they could humanize one another.

Much more seriously, negotiators also engage in a series of bluffing tactics, sometimes designed specifically for media and public consumption. In late September 1987, the Canada-U.S. FTA talks reached an impasse over dispute settlement procedures. Canada badly wanted a mechanism to deal with U.S. trade remedy actions, whereas the United States did not. On September 23, Simon Reisman and the rest of his delegation, very publicly, walked out of the negotiations. 

Such theatrics have multiple purposes in the context of a negotiation. This particular display was expected, but nevertheless intended to send the U.S. team a message about where Canada's "line in the sand" was on the necessity for dispute settlement. More importantly, perhaps, was the political message to Canadians regarding Ottawa's capacity to resist American pressure-- it was mainly Canadian press to which Riesman spoke.

NAFTA 2.0 so far....

Apart from a couple of profiles of the negotiating teams, I have yet to read about any team-building exercises or details of the dynamics across the negotiating table-- although it would be great

December Deadline?

television if Canada could convince everyone to participate in a bonspiel. My bet is that there's some tension given the super-heated rhetoric around trade, border walls, deficits, and withdraw. At the risk of stating the obvious, these are not exactly the best of circumstances in which to be seeking concessions from one another.

So, we've only seen the end of Round 2 of talks, and agreements normally seem completely out of reach right up to the point they happen. However, in just the first two rounds we can already see where the sticking points are likely to be. 

Dispute Settlement

I've noted elsewhere that Chapter 19 and Chapter 11 of NAFTA 1.0 could be toast. The US business community is reportedly lobbying hard to keep Chapter 11, and my guess is that it, and the Investor-State Dispute Settlement (ISDS) mechanisms will find their way into NAFTA 2.0.  However, Chapter 19 is a different story. While there are some American voices who think Chapter 19 is a useful mechanism for defending U.S. interests against Canadian and Mexican trade remedy laws,

Not Exactly How it Works

they are in the minority. It's not that Americans universally hate Chapter 19-- many people knowledgeable about trade may not even know it exists. The problem is that not enough Americans are willing to defend it's utility against those who much more powerfully argue that the whole thing is unconstitutional.

Finally, this could be a sticking point with Canada and Mexico. As noted above, Canada was willing to walk away from the bilateral talks in the 1980s over this single issue; it was Ottawa's line in the sand. Moreover, it was also one of Mexico's lines in the sand during the subsequent NAFTA talks. Both Canada and Mexico have made the preservation-- indeed strengthening of-- Chapter 19 a key goal. We'll see if Canada and Mexico are prepared to walk away over this.

Right to Work

It's been reported in the Globe and Mail that Canada tabled a proposal this weekend that would have the United States use federal legislation to roll-back so-called "right to work" laws in various states. Canada evidently believes this and other measures would contribute to higher wages and stronger worker protections throughout North America, in part by strengthening incentives toward higher unionization rates.

The issue of "right to work" legislation has been swirling in the U.S. in recent years, notably around Boeing's decision to situate a significant portion of it's 787 model production in South Carolina. In general, these are deep legal waters in the United States dating back to at least Lochner v. New York (1905) in the U.S. Supreme Court. However, setting aside legal questions about whether the U.S. Congress could legislatively over-ride state "right to work" measures, it seems entirely implausible that such legislation at the behest of Canada and Mexico would ever see the light of day with pro-business Republicans in control at both ends of Pennsylvania Avenue. I'd be the farm that proposal won't go anywhere.

Visa Access

That same Globe and Mail story from the weekend also reported that Canada wanted greater visa access for North American professionals. Recall that Chapter 16 of NAFTA 1.0 created an entirely new visa category-- the TN Visa-- that would allow business professionals longer-term access to I wrote last February, I suggested there was significant scope for updating Chapter 16. However, I was thinking in terms of an expansion of that visa, including making it easier for Mexicans to actually obtain them as originally envisioned. I'll be pleasantly surprised if anything from Chapter 16 of NAFTA1.0 makes it into NAFTA2.0.

A Rough Start

work in any of the three North American countries. For the United States, this was the one and only time such a visa had been created in the context of a trade agreement and was the one, small, area of the NAFTA that liberalized the movement of people in addition to goods, services, and capital. In a post

Good on Canada for proposing it all be expanded, but amending or modernizing Chapter 16 in an expansionary manner would have been difficult in the best of political circumstances, never mind in the era of Donald Trump. Yesterday's announcement of the Trump Administration's intentions regarding DACA (Deferred Action on Childhood Arrivals), and the 6 months he's "given" Congress to deal with it legislatively, means immigration and labor mobility issues will be on the front burner for the duration of the NAFTA 2.0 talks-- and not in a good way in terms of expanding TN Visa access. Forget that one too.

Environmental standards

North America and the environment is also something I have griped about in this blog before. Indeed, one of the major byproducts of the political debate over NAFTA 1.0 were the Side Agreements on the Environment and Labor. Moreover, even though the Side Agreements were separate texts, legally unconnected to the NAFTA, it was the NAFTA debate that permanently connected trade to labor and environmental issues.

Worked Better than Expected

I have deep misgivings about environmental issues being connected to trade liberalization. I get the argument that the increased trade volumes flowing from liberalization inherently mean more CO2 emissions or other impacts because of more associated production and perhaps transportation. However, I have serious doubts about whether trade negotiations are the proper forum for dealing with these issues. Specifically, proposals to impose carbon levies or taxes on "dirty goods" are too often transparently protectionist proposals aimed squarely at the economies of developing countries, but dressed up as high-minded environmentalism.

I am all for addressing labor and environmental standards, but doing so via trade may be somewhat counterproductive. Because the complaints about labor and environmental standards are most often heard with respect to Mexico, let's assume that improving Mexican labor conditions and the country's capacity to deal with environmental spill-overs from trade is the goal. Trade sanctions placed on "dirty," "unsustainably produced" goods, or upon those made with cheap labor, will only harm Mexico's ability to alter that equation. Wealthy countries are better able to tackle a whole range of labor and environmental issues. Trade is one of the most important paths to that wealth.

A better path is to reaffirm the commitment to the original Side Agreements in NAFTA 2.0, enshrine prohibitions against using reductions in labor or environmental standards as incentives to draw new investment to any of the NAFTA countries, and invest in the North American Development Bank. I bet not many people have heard of this, but it is another (neglected) byproduct of the NAFTA originally designed to assist with environmental improvement projects along the U.S.-Mexican border. Canada has repeatedly been invited to sign on, but has thus far declined.

Rules of Origin

The current threshold for duty-free treatment under the NAFTA is 62.5% North American content. As the car industry has become more integrated globally, and the cars themselves packed with electronics sourced from all over the world, satisfying this requirement has become more and more challenging. There have been proposals to raise the content requirement to 70% and impose stricter supply-chain monitoring mechanisms to ensure that 70% of the vehicle is manufactured somewhere in North America.

What's in the Box?

Rules of Origin are a double-edged sword. Their main purpose is to prevent transshipment of goods from non-NAFTA parties into North America through the party with the lowest external tariff rates. They might boost some regional employment levels and incentivize consumers to purchase domestic cars over foreign manufactured vehicles that are levied a tariff. But one perverse set of incentives the existing rules created was for foreign manufacturers to focus their attentions in the North American export market on higher-end luxury vehicles with larger profit margins. It has also been evident for some years that the paper work required to meet rules of origin requirements has become onerous, with some firms opting to simply pay the MFN tariff rates negotiated under the WTO.

More worrisome for the overall negotiations is a proposal by the Trump Administration to have as part of those rules of origin a requirement that at least 35% of the vehicle be manufactured in the United States to qualify for duty-free treatment. Put differently, the Trump Administration is trying to use revised rules of origin to partly achieve its aim of reducing the US trade deficit with Mexico. Henceforth, any vehicle with less than 35% US-sourced content would be levied a tariff as it entered the United States from either Canada or Mexico. Expect this one to get ugly as the details of Trump's proposal emerge.

Energy/Mexico 

The last bit of news to emerge from Round Two in Mexico City concerned the improvement of many of the energy provisions of NAFTA 2.0, and their extension to more fully integrate Mexico within them. Under NAFTA 1.0, the Mexican energy sector was largely walled-off from the agreement at Mexico's insistence. In recent years, however, Mexico has attempted to unilaterally liberalize PEMEX, the state-run oil company, and allow greater degrees of foreign investment into PEMEX.

However, the modest reforms in Mexico's oil sector have been deeply controversial, and in some quarters as politically unpopular as the Nieto Government that is making them. Although PEMEX is in serious need of foreign investment to facilitate modernization and further exploration of Mexico's resources, it is also an oil company with deep psychological significance for many Mexicans. Politicians tinkering with its status as a state-owned firm do so at their peril.

Hence, even modest proposals to bring the Mexican energy sector more fully within the ambit of the NAFTA 2.0 will be controversial. Next year's national elections in Mexico could potentially be a hard-fought referendum on the country's relationship with the United States and the NAFTA 2.0. If the Mexican energy sector is a major part of NAFTA 2.0, that issue alone will intensify the referendum-like quality of those elections.