NAFTA renegotiations are heating up and large sections of the business community as well as lawmakers from the U.S., Canada and Mexico are getting nervous.
The fourth round of renegotiations of the North American Free Trade Agreement kick off in Arlington, Virginia, on Wednesday. Officials are expected to cover more than two dozen topics during the seven-day event. Reports indicate the Trump administration has on the agenda a handful of proposals that stand to prompt significant backlash from the United States' trading partners and parties at home.
The Trump administration's representatives, led by United States Trade Representative Robert Lighthizer, plan to push an overhaul of auto rules of origin and major changes to the way dispute settlements are handled, according to a report from Axios. They will also propose placing a five-year sunset on the 1990s-era agreement, meaning that every five years the U.S., Canada and Mexico would have to restate their willingness to continue.
"NAFTA is a disaster as a deal," Trump said in an interview with Forbes published on Tuesday, repeating a line he often used on the campaign trail. "Now we're renegotiating it. I happen to think that NAFTA will have to be terminated if we're going to make it good. Otherwise, I believe you can't negotiate a good deal. It's a terrible deal for our country."
"Trump sets fire to negotiations," read a headline Wednesday in Mexican media outlet El Economista. Idelfonso Guajardo. Mexican economy minister Ildefonso Guajardo in a Mexican radio interview Tuesday said Mexico could exit NAFTA without serious consequences if necessary.
Canadian Prime Minister Justin Trudeau will meet with U.S. President Donald Trump in the White House on Wednesday. He is also expected to meet with the House Ways and Means Committee.
U.S. Chamber of Commerce President Tom Donohue told a Mexico City audience on Tuesday that recent developments in U.S.-Mexico relations are "concerning" and warned that the "existential threat" to NAFTA is "a threat to our partnership, our shared economic vibrancy, and clearly the national security and safety of all three nations" in the pact.
"For those of us deeply invested in the NAFTA debate...we've been on something of a roller coaster ride," he said.
He cited a number of areas of concern, including the U.S.'s proposal to tighten rules of origin (the percent of a product that must be produced in NAFTA countries). In the automotive sector, 62.5% of a car or truck must already be produced in North America to qualify for duty-free treatment.
Commerce Secretary Wilbur Ross has in the past criticized NAFTA's rules of origin as a "back door" for Chinese auto parts to enter the U.S. through Mexico and Canada. The White House is aiming to push for an even higher percentage and tightening rules.
If the administration's proposal were to move forward, "companies would cease trading under NAFTA and simply pay the generally low U.S. tariffs established under the rules of the [World Trade Organization]," Donohue warned.
Automakers have voiced resistance to changes to NAFTA's rules of origin as well.
"We certainly think a U.S.-specific requirement would greatly complicate the ability of companies, particularly small- and medium-size enterprises, to take advantage of the benefits of NAFTA," Matt Blunt, president of the American Automotive Policy Council, told Reuters in August. The trade group he heads represents Detroit automakers General Motors (GM - Get Report) , Ford (F - Get Report) and Fiat Chrysler (FCAU - Get Report) .
The business community has also expressed concern about the White House's proposed sunset clause and proposals that would weaken the investor-state dispute settlement process, which allows investors of one NAFTA party to bring claims directly against the government of another NAFTA party. They worry it would diminish the value of cross-border investments and complicate future planning.
"[ISDS] ensures that investors are treated fairly and compensated in the event of expropriation," Donohue said. "Making it optional would raise questions around the world about America's commitment to these due process principles."
The U.S. farming industry has expressed alarm over NAFTA renegotiations as well. The American Farm Bureau Federation, the top U.S. agriculture group, has joined Farmers for Free Trade, an umbrella group of agricultural organizations and agribusiness promoting exports.
"We can't sit aside while other countries work out trade deals among themselves," Zippy Duvall, president of the bureau, said in a conference call announcing the decision on Tuesday reported by Bloomberg.
To be sure, NAFTA renegotiations are far from over. There are still likely to be at least two, if not three, more rounds of negotiations after this one, according to a timeline released by Washington, D.C. analyst firm Height Securities, and any changes to the deal will have to go through Congress. And there are other political factors in play as well: Mexico's presidential election in July 2018, and the U.S. midterms later that year in November.
"Politicians in either country may be hesitant to vote on complicated trade matters a few months prior to an election," analysts warn.