There’s a new rush of optimism on NAFTA, a sprint to strike an agreement-in-principle before the Summit of Americas in Peru next week. Yes, next week.
Suddenly, there’s a window of opportunity. The rush job is possible only because the United States, Canada and Mexico are talking about part of a deal, not the whole thing. The idea is to take some key points of agreement, particularly in the auto sector, and tie them up in a package with a political message. The message is, “this deal can be done.”
The caveat is that still requires U.S. President Donald Trump to make some concessions on so-called poison pills. For Canada, that means the United States must soften on independent settlement of disputes between countries.
An “agreement-in-principle” is so close but still so far away.
There’s no template for what an agreement-in-principle actually is. It’s a term of convenience, a political description designed to indicate the talks are on track, but an agreement-in-principle won’t bind the three countries to conclude the renegotiation of the North American free-trade agreement. Part of the talks on now are about what should be in an agreement-in-principle.
That actually makes it easier to strike a deal by next Friday, when the leaders of all three countries attend the Summit of the Americas. An agreement-in-principle can leave out all kinds of things – not just details, but big things the sides haven’t settled.
If Mr. Trump is willing to take progress on some trade matters and slap the word “agreement” on them, Canada and Mexico will take it. In theory, it puts the United States on track to complete a renegotiation of NAFTA rather than threatening to trigger its collapse.
It might improve investor confidence, particularly if there is a solid agreement on rules for the auto sector, a major issue for all three countries. Mr. Trump can use the agreement-in-principle as a reason to exempt Canada and Mexico from tariffs on steel and aluminum, from which both are shielded on a temporary basis. Sure, Mr. Trump might starting tweeting new NAFTA threats in a month, but that’s a chance Canada and Mexico will take.
But there is still the “principle” in agreement-in-principle. Canada and Mexico will have a hard time applying that label unless the United States indicates it will bend on things the other two countries said are completely unacceptable.
The United States wants to scrap the independent dispute settlement mechanism in Chapter 19 of NAFTA that can be used to settle beefs between countries – but Canada has said that’s a red line and it won’t do a deal without it. It will be hard for Prime Minister Justin Trudeau to justify to even an interim deal without a sign the United States can accept independent dispute settlement in some way.
The mad sprint for a quick NAFTA deal is on, but it’s not at all clear there’s going to be a finish line.
There are signs Mr. Trump is now more motivated to show advances on NAFTA. His administration dropped auto-sector demands that Canada and Mexico deemed unacceptable, which started the new wave of optimism in recent weeks. Mr. Trump has expressed a desire to get a NAFTA deal done before the Mexican presidential election campaign kicks into gear in May – a new president won’t be inaugurated until December.
The real motivator is that Mr. Trump has another trade front now. The United States is targeting China with stiff tariffs and China plans to retaliate. Stock markets have been riled. U.S. farmers in Republican states worry they’ll be hurt by Chinese tariffs on pork and soybeans – so they don’t want to think about the possibility of Mexican corn tariffs, too. It would probably do Mr. Trump good to show he won’t be in a trade war with the whole word and that he can make a deal. An agreement-in-principle on NAFTA sends that signal.
Of course the big issue is that even if Canada, the United States and Mexico reach an agreement-in-principle, there’s no guarantee a final NAFTA renegotiation will be completed soon, or ever. There will still be lots to negotiate. The old cliché about trade negotiations is that there’s no agreement on anything until there’s agreement on everything.
But at the moment, there’s a brief window where all three countries think it’s in their interest to agree on something now. Yet, Mr. Trump has to make key concessions before even that deal can be done.