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What’s hanging up a NAFTA deal as deadline passes?

When he rode into office promising an overhaul of the North American free-trade Agreement, U.S. President Donald Trump vowed to finish renegotiations within months. His first deadline was December, 2017. Then, March, 2018. Then, late April.

Last week, House of Representatives Speaker Paul Ryan set May 17 as the last possible day for a deal that could be approved by Congress before the end of this year.

Related: NAFTA renegotiation set to miss key deadline as countries remain divided on major issues

On Thursday, Mr. Ryan’s deadline arrived with no conclusion to NAFTA talks in sight. None of the most contentious demands have been resolved at the bargaining table. What’s more, the United States is threatening to hit Canada and Mexico with steel and aluminum tariffs if there is no agreement by June 1.

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Canadian officials are making a last-ditch push for a quick resolution. Justin Trudeau’s chief of staff, Katie Telford, and Brian Clow, head of the Canada-U.S. relations unit in the Prime Minister’s Office, travelled to Washington for talks with the Trump administration. Foreign Affairs Minister Chrystia Freeland also arrived in the U.S. capital to sit down with business and labour leaders. And Mr. Trump telephoned Mr. Trudeau Thursday evening for their second NAFTA discussion this week.

Mr. Ryan, for his part, gave some reason for hope, saying there could be a week or two worth of wiggle room in the congressional calendar if an agreement were finished in the next few days.

Some officials have floated the possibility of a so-called “skinny” deal, under which Canada and Mexico would agree to stricter rules for auto makers – the Trump administration’s priority in the talks – and a handful of uncontroversial issues, in exchange for the United States leaving all other contentious areas in the pact untouched.

But such a limited agreement would risk looking like a defeat for Mr. Trump and could fail to pass the U.S. Congress – leaving him no choice but to dig in for the long term.

Even as Mr. Trudeau told the Economic Club of New York on Thursday that he was “feeling positive” about a deal, Mexican Economy Minister Ildefonso Guajardo addressed him on Twitter to say it would be “unacceptable” if a renegotiated NAFTA leads to job losses in Mexico – an apparent reference to Trump administration demands for auto-sector rules designed to move car plants to the United States.

And Robert Lighthizer, Mr. Trump’s trade chief, said in a statement that the three countries were “nowhere near close to a deal” but he would “continue to engage in negotiations.”

Without a quick resolution, negotiations could drag on into 2019, leaving the pact that governs more than $1-trillion in continental trade up in the air.

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Here is what you need to know about the state of play in NAFTA talks, what Thursday’s deadline means, and what happens next.

Why are we renegotiating NAFTA, again?

Mr. Trump argues the pact, which came into effect in 1994, allows Canada and Mexico to “take advantage” of the U.S. In particular, he blames NAFTA for the loss of American factory jobs. This message helped him win the 2016 election by taking rust-belt votes in Ohio, Michigan and Pennsylvania.

Canada and Mexico could theoretically have refused to renegotiate NAFTA, but Mr. Trump threatened to pull the U.S. out of the deal. Also, the Canadian and Mexican governments saw this as an opportunity to make some less controversial updates to the 24-year-old agreement, such as adding rules covering the digital economy.

Why is there a congressional deadline?

Under U.S. trade law, Congress delegates the ability to negotiate trade deals to the President, subject to a series of procedural timelines. These include a 180-day period for the U.S. International Trade Commission to review and report on a negotiated deal before it is submitted to Congress for approval.

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Because of those timelines, plus other business on the congressional calendar and midterm elections in November, Mr. Ryan said he needed to see a deal by May 17 for Congress to have enough time to vote on it by the end of the year.

Further complicating matters, the Trump administration is already in a standoff with its own Republican congressional caucus over one of the most contentious pieces of NAFTA: Mr. Lighthizer wants to pull the U.S. out of the Chapter 11 system that allows companies to sue governments at special trade panels.

Mr. Lighthizer argues that the Chapter 11 panels impinge on national sovereignty and encourage U.S. companies to do business in Mexico by allowing them to bypass the local court system when they get into a fight with Mexican authorities. Most other Republicans, however, want businesses to have this protection.

Why does anyone care about this deadline?

For one, a new Congress will take office at the start of 2019 and could set out new priorities for trade talks. Incorporating those into NAFTA bargaining, on top of what has already been negotiated, could take even more time.

Also, Mr. Trump would like to conclude talks for political reasons: Renegotiating NAFTA was a major campaign promise, and the sooner he can complete it, the better he can argue he is implementing his agenda.

What is deadlocked at the bargaining table?

Currently, the toughest sticking point is a U.S. demand that 40 to 45 per cent of the parts in North American-made vehicles come from factories where workers earn at least US$15 to $17 an hour. This is designed to push auto jobs away from Mexico, where workers make closer to US$4 an hour. Mexico, not surprisingly, is fighting this proposal.

The wage requirement is one of a long list of changes to the “rules of origin” governing auto content the U.S. wants to impose, in a bid to move factory jobs back to North America. Other rule changes the U.S. wants include requiring auto makers to use at least 70-per-cent North American-made steel, glass and aluminum in their vehicles.

There are several other contentious U.S. demands that are also at an impasse, including:

  • A Buy American procurement rule that would severely limit the amount of U.S. government contracting Canadian and Mexican firms could bid on.
  • A sunset clause that would automatically terminate NAFTA in five years unless all three countries agreed to keep it.
  • Abolishing the Chapter 19 dispute resolution system, which Canada has successfully used to challenge U.S. tariffs on softwood lumber, and making a different dispute settlement provision, Chapter 20, non-binding.
  • Abolishing Canada’s protectionist supply management system, which fixes prices for milk, eggs and poultry, in part by slapping tariffs on foreign imports.

What happens now?

One option is to try to reach a “skinny” deal, which would see an agreement on new auto-sector content rules in exchange for the U.S. dropping all of its other contentious demands – and effectively leaving those areas of NAFTA unchanged. Mexico has proposed something along these lines, said sources with knowledge of the discussions, but has so far met a cool response from the U.S.

The advantage of a “skinny” agreement is that – if it were reached quickly enough – there is a slight chance it could still get through the procedural timelines and be submitted to Congress this year.

The disadvantage, however, is that a deal focused only on autos would exclude some of the things Congress has listed as priorities in trade talks, such as prying open Canada’s dairy market. Leaving those parts of the deal unchanged could make it harder for Mr. Trump to secure congressional approval.

Also, it could hurt Mr. Trump if, after all of his promises about overhauling the deal, he came back with major changes in just one area of the pact.

The other scenario is for the three countries to simply keep negotiating as they have been before. This is what Canada has signalled it is prepared to do. It could ultimately make for a long, arduous stretch of talks, extending into next year.

Another possibility is that Mr. Trump tries to bypass Congress and implement any NAFTA deal with Canada and Mexico by executive order. There is some precedent for changes to NAFTA – particularly in the rules of origin – that do not have to go through Congress. But making any substantial changes without a vote is certain to anger legislators and could lead to a court battle.

Are there other deadlines that matter now?

When Mr. Trump brought in tariffs of 25 per cent on imported steel and 10 per cent on aluminum earlier this year, he gave Canada and Mexico a temporary pass. Getting a permanent exemption, he said, was dependent on a NAFTA deal.

The current exemptions run out on June 1, and the White House has previously said there would be no more temporary exclusions. So, in theory, Canada and Mexico will be slammed with steel and aluminum tariffs if NAFTA talks aren’t finished by the end of this month. Given that the U.S. is Canada’s largest customer for both of the metals – and that Canada is heavily integrated into the supply chains of American manufacturers – such tariffs would be painful for both Canadian and American companies.

Also, Mexico holds a presidential election on July 1, with the winner taking office in December.

The front-running Mexican presidential candidate, Andres Manuel Lopez Obrador, has vowed to put his own negotiating team in place if NAFTA talks are still going on after he takes power. This could add another wrinkle.

Could Trump still tear up NAFTA if he thinks negotiations are taking too long?

The President’s threats to pull out of the deal have become less frequent in recent months, but it’s still theoretically a possibility.

Under NAFTA’s Article 2205, any country can quit the deal after six months’ notice.

However, Congress – and particularly free-trade Republicans who are often more aligned with Canada and Mexico in the talks than with their own President – would be likely to argue the President cannot pull the U.S. out without their approval. This would set the stage for a further legal battle.

In short, we could be hearing about NAFTA for a very long time to come.

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