NAFTA Series Part II: The Current Debate

This is the second article in a series about the North American Free Trade Agreement (NAFTA) and its importance to the plastics industry. In the first, we covered the history and purpose of the trade deal. In this piece, we’ll look at the current debate surrounding NAFTA’s renegotiation.

A TIMELINE

As outlined in the previous installment of our NAFTA series, “NAFTA: What Is It And Why Should We Care?“, much of the North American economy’s growth of the last two decades can be attributed to NAFTA; this is especially true for plastics.

But no trade deal is perfect, and NAFTA, too, has critics. Concerns about the world’s largest trade agreement come up most often during election season. This was the case in 2016 when then-candidate Donald Trump made NAFTA a staple of his campaign, calling it “the worst trade deal ever” and promising to reform it completely or scrap it altogether.

For the past nine months, trade representatives from the U.S., Canada, and Mexico have been meeting in various North American cities to revise the deal. While the U.S. administration has sought a fast NAFTA rewrite, the negotiations have been difficult and are unlikely to conclude this year in light of upcoming national elections in Mexico in July and in the U.S. in November. U.S. congressional rules also mandate a 90-day notification of trade deal amendments, whose unofficial deadline has passed.

Though frequently repeated, the U.S. administration has not followed through on its threat to scrap NAFTA entirely. In fact, it is not clear that the American president can unilaterally do this. NAFTA’s passage required congressional approval, and so, likely, would its dissolution.

However, the administration is pressuring its NAFTA trading partners in other ways, such as using a special authority that permits the president to unilaterally impose trade restrictions where the nation’s security is at stake. First was a controversial imposition of 25 percent tariffs on steel imports and 10 percent tariffs on imported aluminum. In another recent announcement, the administration has threatened to raise tariffs by 25 percent on auto imports. It’s noteworthy that Mexico and Canada are the U.S.’s largest sources of auto imports.

In spite of this pressure, NAFTA trade talks continue “at the staff level,” rather than among top negotiators.

THE REVISIONS

There are 25 chapters of NAFTA. Negotiators have fully revised six of them so far and are close to completing the revisions of another eight to 10. At best, they are halfway there. At worst, as voiced in the May 23 words of U.S. trade representative Robert Lighthizer, negotiators are “nowhere close to a deal.”

According to many news sources, the major cause of delay has been auto content requirements. The U.S. wants a greater percentage of automobile production to originate in North America (the current requirement is 62.5 percent of a vehicle’s content; the U.S. proposed an increase to 75 percent). Further, the U.S. wants more of this production to occur in regions where labor wages are at least $16 an hour. It is doubtful, however, that automakers could comply with the first mandate because of the complexity of their established supply chains; and wage requirements might severely impair Mexican production. Even The Auto Alliance, a group of U.S. and foreign automobile makers, is cautious about the U.S. demands.

Other contentious issues include the U.S. administration’s insistence on the addition of a “sunset clause” and the removal of investor-state dispute resolution procedures. The sunset clause would require NAFTA to be re-ratified every five years by all three countries. Opponents of the sunset clause argue that it would create uncertainty and discourage long-term investment.

As for the dispute procedures, NAFTA currently has embedded dispute resolution procedures to handle grievances between foreign investors and member countries. The U.S. proposal would remove these procedures and permit aggrieved parties to bring actions in domestic courts. Critics believe this could lead to bias rulings and further discourage cross-border investment. Mexican and Canadian trade representatives have already said they will not sign on to such changes.

While these are the most contentious issues in the NAFTA negotiations, unresolved issues also remain in regard to agriculture, oil and gas trade, labor unions in Mexico, intellectual property, cross-border trucking regulation, and the absence of provisions addressing digital trade.

PLASTICS

So how does all this relate to plastics?

The main worry for the plastics industry is not so much a revised NAFTA, but the possibility of getting rid of NAFTA altogether. In fact, the major plastics associations of Mexico, Canada and the U.S. all agree that a “modernized” NAFTA is a good thing. In a coordinated memo prepared late last year, these associations outlined what they’d want from an updated trade deal:

• More consistent product regulation (e.g., food packaging).
• A review of “Rules of Origin.”
• Simplified trade and customs procedures (with an emphasis on digital technology, which is entirely lacking from the original).
• Easier employee access and travel across borders.
• No new tariffs.
• The continued flexibility of labor costs.

Other groups, like the Independent Chemical Information Service, are happy to have NAFTA remain as it is: “The plastics industries in Mexico and the US [sic] are well aware of the benefits of the current arrangement, and their corresponding trade groups are working with their peers in Canada to preserve NAFTA.”

If NAFTA were scrapped, tariff levels for plastics products would resort to “Most Favored Nation” [MFN] levels dictated by the World Trade Organization. Depending on the good, these tariffs range from around 3 to 6 percent; but as the American Chemistry Council writes, “even the generous…[MFN] tariffs would be harmful, encouraging Canadian and, more importantly, Mexican imports from other countries like China, Brazil, or European countries.”

CONCLUSION

Like the auto industry, North American plastics rely on an integrated supply chain made possible by NAFTA. The free movement of goods across borders means that U.S. plastics, in particular, can maintain its $10 billion surplus with Mexico and its almost $750 million surplus with Canada. The protections for investors and rules for trade also give the assurances required for long-term investment, which further develops the industry, integrates supply chains, creates North American jobs, and increases competition in the global market.

In our next post (NAFTA Series Part III: Consequences of Negotiations), we’ll look at real-life examples of how current trade talks are affecting business.

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