On the brink — Preparing for a post-NAFTA world

by Keith Nunes
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Keith Nunes

The possibility that the United states will withdraw from the North American Free Trade Agreement is very real. Little progress has been made during the first rounds of renegotiations, and as the trade representatives from the United States, Canada and Mexico regroup this month in Mexico City significant barriers remain in the way of reaching an agreement through talks that are to continue into next year.

The fourth round of negotiations ended with only limited results on Oct. 17. A joint statement from representatives of the three nations noted a “significant conceptual gap” over revision to the agreement but said some common ground had been reached in the less controversial parts of the negotiation.

Issues of disagreement include such U.S. proposals as requiring that 50% of the value of all cars, trucks and large engines produced in the NAFTA countries and benefiting from the pact’s provisions be derived from components manufactured in the United States. Another U.S. proposal seeks to limit or eliminate independent panels that resolve disputes on trade and investments under NAFTA, and U.S. representatives proposed a sunset clause that would see NAFTA expire after five years unless the three governments agree to extend it on a regular basis.

American withdrawal from NAFTA
While hope remains that NAFTA will be successfully renegotiated and the United States will remain a member of the organization, it is incumbent on businesses and their representative trade associations to prepare for an American withdrawal.
 

What is distressing about these points of contention is they are opposed not only by Canada and Mexico, but also the U.S. business community. On Oct. 13, John Murphy, senior vice-president of international policy at the U.S. Chamber of Commerce, said the administration’s proposals had “no identifiable constituency backing them” and had sparked “a remarkable degree of unity in their rejection.”

Under NAFTA, U.S. food and agriculture exports to Canada and Mexico have grown 450% over a 23-year period. In 2015, the United States held a 65% market share for agricultural products in the NAFTA region, and in 2016, the United States exported nearly $43 billion worth of food and agricultural goods to Canada and Mexico, making the NAFTA partners the largest export consumers of U.S. agriculture. Any disruption to the flow of goods and services will have a significant impact on the U.S. agriculture industry.

The ramifications will be immediate if the United States withdraws from the agreement, particularly for the agricultural community upon which the food processing industry depends. Tariffs on a wide range of goods and services will rise to pre-NAFTA levels or they may rise in accordance to World Trade Organization rules since all three countries are members. NAFTA rules will remain in effect between Canada and Mexico since they have expressed no interest in withdrawing from the agreement.

While hope remains that NAFTA will be successfully renegotiated and the United States will remain a member of the organization, it is incumbent on businesses and their representative trade associations to prepare for an American withdrawal. The impact will be swift and for many businesses and agricultural segments harsh. Perhaps that will be followed by the hard slog of negotiating bilateral agreements with Canada and Mexico, but it is unclear what the Trump administration’s goals will be if such circumstance come to pass.

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