NAFTA Renegotiation and Future Scenarios
for North America’s Supply Chains – Part 1

NAFTA Renegotiation and Future Scenarios
for North America’s Supply Chains – Part 1

Executive Summary

  • The new NAFTA talks between U.S., Canada, and Mexico began last August, with the three sides swapping proposals and negotiating the less contentious parts of the deal. Despite progress during the last ten months, the most contentious issues have yet to be decided, including dispute settlement, rules of origin on vehicles and textiles, the sunset clause and major market access rules. 
  • U.S. President Trump has shown his willingness to use tariffs as a negotiation ploy to force Mexico and Canada to further open up their markets for American companies. The Trump administration’s tariffs on steel and aluminum introduced in May 2018 incited retaliation from Mexico and Canada, and added a new wrinkle to the NAFTA discussions. 
  • On the Mexican side, trade representatives have shown willingness to compromise on key issues such as vehicle content, environmental standards, and wages, while rejecting U.S. demands to rework the corporate arbitration system and limit the number of U.S. contracts that can be awarded to Mexican or Canadian vendors. 
  • The Canadian position with respect to the Trump tariffs has been one of reciprocity, demonstrating openness towards a “new NAFTA”, with as minimal damage to Canadian economic interest as possible. 
  • Finally, the recent Progressive Conservative surge in Ontario and Lopez Obrador’s landslide victory in Mexico add more uncertainty to an already complex dynamic of US-Mexico-Canada trade relations and resulting impacts to supply chain network setups. 
  • Part 1 of this report outlines the current developments in the NAFTA renegotiations, highlights Canada’s top priorities and challenges in a renegotiated NAFTA, and explores what Lopez Obrador’s victory in Mexico means for the treaty. Part 2 of this report will analyze different NAFTA scenarios and its implications for regional supply chains in the automotive, aerospace, technology, chemicals and apparel industries. 


Since the North American Free Trade Agreement (NAFTA) entered into effect in 1994, the economies of North American countries have become increasingly integrated as efficient supply chains developed across the region. NAFTA removed many tariffs and non-tariff barriers to trade between the United States, Mexico, and Canada. Since then, trade among the three countries has increased 258.5%¹. The agreement has helped minimize production costs in the U.S., enabling regional economies of scale that make efficient production possible. However, not everyone has celebrated this development. As in any trade agreement, NAFTA has created both winners and losers. In the U.S., certain political factions have blamed NAFTA as the source of a widening trade deficit, eroding industries, and a stranded workforce. During the last two years, U.S. President Donald Trump has emerged as one of the main critics of the 23-year-old pact. 

In June 2016, then-candidate Trump made the promise of renegotiating NAFTA or failing that, pulling out of the agreement entirely. As President, he immediately started work to fulfill that promise. On May 18, 2017, President Trump signed an executive order to renegotiate NAFTA. Soon after the United States made it official its intent to renegotiate NAFTA, the leaders of Canada and Mexico indicated their willingness to work with the Trump administration. In July 2017, the Trump administration provided a detailed list of changes that it would like to see to NAFTA. The main goal was to cutback the United States’ trade deficit. The administration also called for the elimination of provisions that allowed Canada and Mexico to appeal duties imposed by the United States and limited the ability of the United States to impose import restrictions on Canada and Mexico. 

The key issues facing the NAFTA renegotiation process are outlined below. 

Key Issues Current state U.S. proposal Canada’s counterproposal Mexico’s counterproposal 
Automotive rules of origin Duty-free cars must contain at least 62.5% American, Canadian or Mexican content 85% for NAFTA content and 50% U.S. content for vehicles Canada has shown flexibility to strengthen automotive rules of origin but argues that any change must apply equally to all three countries, henceforth resisting the initial proposal, yet contemplating lesser ones for NAFTA/US content Mexico is willing to increase the NAFTA content requirements, while also expanding content definitions to include research and development expenditures 
Dispute Resolution Dispute Resolution for complaints about illegal subsidies and dumping Eliminate the Dispute Resolution tool, as it infringes on the sovereignty of its domestic laws Canada agrees that Chapter 19 can be updated but argues that a Dispute Settlement mechanism must be part of any updated agreement Mexico also says dispute settlement mechanisms are a vital part of the deal to give investors security and removing it could lead to an increase in duties 
Supply Management Quota provisions for several agricultural commodities including dairy, poultry, and sugar Eliminate non-tariff barriers to agricultural exports, specifically Canada’s restrictions on dairy imports To date, Canada has firmly rejected the U.S. demand to end its agriculture policy which protects Canadian dairy, poultry and egg producers Mexico supports the U.S. proposal to eliminating restrictions on Canada’s agricultural sector 
Government Procurement Members cannot favor domestic companies in government contracting; sets no restrictions based on reciprocal value Limits the value of procurements to the reciprocal dollar value of procurements that U.S. companies receive from the other parties Canada is pushing for a freer market for government procurement by removing the “Buy American” provisions Mexico wants to limit the value of procurement-tenders awarded to American companies to the same amount that Mexican firms get in the U.S. 
Investor-State Dispute Settlement (ISDS) Investors can bring claims directly against the government of another NAFTA country. Allow states to opt-in to an ISDS system, so that only states that have opted in can be the subject of investor-state claims Canada wants to update the ISDS system to allow governments to regulate in the interest of the environment or labor Mexico wants NAFTA to provide ISDS mechanism only to persons of states that have opted in to ISDS 
“Sunset clause” No sunset clause or regular reviews exist NAFTA members are allowed to withdraw after five years unless renewal is agreed upon by the parties Canada has rejected the U.S. demand for a sunset clause in NAFTA but it is prepared to compromise on the issue Mexico is willing to review the agreement every five years and make proposals 

On August 2017, after months of repeated threats by President Trump to withdraw from NAFTA, the United States, Canada, and Mexico began negotiations with the goal of modernizing the trade deal and ensuring it reflects North America’s twenty-first-century economic reality. NAFTA renegotiation was a very rushed process at the beginning, with five rounds of talks in only four months. After an initial bout of optimism, government officials and business leaders from the three countries became more pessimistic about the future of the agreement. 

On October 2017, U.S. Trade Representative Robert Lighthizer declared that new proposals have created challenges and that there were significant conceptual gaps among the parties². The U.S. was trying to negotiate a guaranteed level of U.S. content in all NAFTA products in order to redress the issue of trade deficits. That, apparently, is a no-go area for Canada and Mexico. Similarly, on May 2018, both Canada and Mexico accused the Trump administration of ‘bullying’ them into removing the international arbitration panels that currently resolve commercial disputes and creating a sunset clause that would end the deal every five years unless explicitly renewed. Both Mexico and Canada have described those measures as unacceptable. USTR Office, “Trilateral Statement on the Conclusion of the Fourth Round of NAFTA Negotiations.” October, 2017. 

NAFTA Renegotiation Timeline

On May 2018, in a somewhat unexpected move, the Trump administration decided to impose steel and aluminum tariffs on Canada, Mexico and much of the rest of the world. One week later, in retaliation, Mexico imposed a series of tariffs ranging from 15% to 25% against U.S. exports including pork, apples, potatoes, bourbon as well as different types of cheese. Moreover, at the end of June 2018, Canada imposed retaliatory tariffs on steel, aluminum and dozens of U.S. products, targeting lawmakers in politically sensitive U.S. states. 

New U.S. Tariffs Canada’s Reciprocal Tariffs Mexico’s Reciprocal Tariffs 
25% Tariff:  – Steel products
10% Tariff:  – Aluminum 
25% Tariff: 
– Iron and non-alloy steel in ingots or other primary forms, including semi-finished products 
– Stainless steel ingots or other primary forms 
– Other alloy steel in ingots or other primary forms 
– Tubes and pipes, sheet piling, railway construction material, and pipes for oil or gas pipelines
10% Tariff: 
– Food products 
– Whiskey 
– Personal grooming products 
– Household products 
– Hardware products 
– Aluminum bars, rods, wire, sheets, foil, tubes and pipes 
– Aluminum kitchenware 
– Aluminum appliances 
– Miscellaneous items, including lawn mowers, electrical boards, panels, motorboats, and mattresses 
25% Tariff: 
– Steel products, including bars and flat-rolled steel 
– Whiskey 
– Fresh cheese
20% Tariff: 
– Pork legs and shoulders 
– Ham and sausages 
– Apples 
– Potatoes 
– Cranberries 
– Parmesan and grated cheese
7%-15% Tariff: 
– Metal furniture 
– Lamps and lighting fittings 
– Fans and air pumps 
– Aluminum kitchen 

In recent weeks, the Trump administration has continued its threat to apply tariffs on Mexico and Canada if a deal is not reached. The U.S. President has repeatedly stated that he is willing to apply tariffs on imports of all autos and auto parts which, if imposed on NAFTA countries, would go against the core principles of the agreement. Most analysts agree that if the U.S. moves forward with tariffs on auto imports, it would be a blow to Mexico and Canada’s economies because of the critical nature that the auto industry plays in both countries. The move has been viewed by Mexican and Canadian officials as a negotiating ploy to wring concessions, but one which has heightened uncertainty over the accord. 

Canada’s Tit-For-Tat Response to Trump’s Tariff Pressure

Canada’s previous firm adherence and support for NAFTA is now under risk as a result of maneuvers taken by the Trump administration. The Liberal Party platform of 2015 emphasized maintenance of NAFTA’s status quo, a position rendered moot by the Trump administration, which insists on changing the treaty. The Trudeau government’s strongest emphases were on editing and challenging the American proposal on NAFTA and US origin demands on auto manufacturing. An additional pressure on the Trudeau government in NAFTA negotiations is preservation of Canada’s ‘supply management’ regime of price supports for the dairy industry. Current positions indicate that auto manufacturing is the point of greatest convergence between the US and Canada, while dairy supply management will be the point of greatest divergence. Moreover, options for results of treaty renegotiation have ranged from maintaining the status quo, elimination of certain clauses, or elimination of the entire agreement in favor of bilateral agreements in the mold of past models such as the Canada-US Free Trade Agreement (CUSFTA), or a completely new NAFTA. 

The latest indications show that Trudeau favors a new NAFTA, as long as Canadian agriculture is protected. This is a considerable sticking point as the dairy sector is the second largest agricultural component of the Canadian economy. As the majority of dairy farmers reside in Ontario and Quebec, Canada’s most populous provinces, any real or perceived threat to dairy exports could escalate pressure on provincial governments as well as federal MPs. 

A future point of contention, in addition to the Trudeau tariffs, would be persistent trade reciprocity. Trudeau’s party supports trade reciprocity not only with respect to the Trump tariffs, but also against federal and state ‘Buy American’ acts and intellectual property, most notably pharmaceutical patents. Reciprocity, however, won’t be well received across all sectors, most notably in metal manufacturing and auto. As Windsor is host to several auto manufacturing outposts headquartered in its neighbor to the south, Detroit, both Trump and Trudeau tariffs have raised alarm bells among southern Ontario MPs. Moreover, Trudeau is under pressure to prevent inbound shipments of steel previously displaced en route as a result of US tariffs from arriving on Canadian shores, thus flooding the market. As a result, Trudeau announced his intentions of imposing steel and similar tariffs on China to prevent flooding. 

In terms of political risk, Trudeau’s moves have sparked a patriotic fervor among many Canadians. Reports and social media show that Canadian consumers have forgone U.S. travel and purchase of American-made goods in repudiation of President Trump and the tariffs. While some have expressed concerns that tariff reciprocity may be prohibitive in accessing American IP, others see benefit in reversing a Canadian STEM brain-drain that saw tech talent flow from Waterloo, Vancouver, and Toronto to Silicon Valley. A CTV News poll has indicated that a majority of Canadians support the retaliatory tariffs, are optimistic that a renegotiation of NAFTA will meet Canada’s economic interests, and that persistent diplomatic outreach can make the United States more willing to compromise in negotiations. Additionally, this turn of events could well turn into a political boon for Trudeau. 

Approval and Confidence Ratings of Current State of Affairs Source: CTV News 

Adding a new wrinkle to Trudeau’s strength in Ottawa, the rest of 2018 consists of a series of municipal and provincial regular and bi- elections. The most notable are the Ontario Progressive Conservative leadership election and the Ontario provincial election, which made Doug Ford the Premier of the province. Moreover, Jagmeet Singh, leader of the New Democratic Party, has expressed positions antithetical to free trade, as well as willingness to work with the federal Conservative Party if it meant undermining Trudeau. 

Both Singh and Ford represent factions of their respective parties most inimical to free trade, and thus despite differences in how each would approach Trump, would be expected to at the very least complicate efforts by Trudeau to facilitate trade if their relative bargaining positions improved. However, since the reciprocal tariffs have provided a popularity boon to Trudeau, this may strengthen his position if the Canadian economy holds up before next elections, which could be called as late as October 21, 2019. 

Overall, Trudeau’s policy of trade reciprocity with Trump is providing an ambient of stability amidst continental uncertainty. It can be anticipated, based on past inclinations, that Trudeau will continue the tit-for-tat responses to Trump’s increased tariff pressure, while maintaining a diplomatic approach in a trade war environment, seeking the best possible framework that accounts for the Canadian national economic interest. As tariff retaliation continues to escalate, there will be concerns that if left unchecked, considerable damage and difficulty will be done to Canada’s ability to trade not only across the border, but also across the Pacific. These maneuvers have been viewed as a possible negotiating ploy to restart NAFTA talks, which may resume following the historic July 1st presidential election in Mexico. In the meantime, Trudeau’s willingness to stand up to Trump’s tariffs has earned him the support of the Canadian people for the foreseeable future. 

Mexico’s Presidential Election Results

On July 1, Andrés Manuel López Obrador, a 64-year-old former mayor of Mexico City, won a landslide election victory, becoming the first leftist to win the Mexican presidency since the turn of the century. López Obrador won the presidency with close to 53% of the votes, 30 percentage points higher than his closest rival. And for the first time since 1997, Mexico’s presidential party will also control both Houses in Congress. López Obrador’s coalition is on track to win more than three-fifths of seats in the lower house and 70 of 128 in the Senate, according to several projections. 

But these are not all good news for international markets and multinational corporations; López Obrador has been compared to both Donald Trump and former Venezuelan President Hugo Chavez in his populist style and ambitious promises to help the poor while keeping the budget deficit low. However, most analysts believe López Obrador has more in common with Brazil’s former president Luiz Inácio Lula da Silva, a pragmatic leftist who enacted some pro-market policies. López Obrador has promised to guarantee individual and property rights, promised respect for the autonomy of the Bank of Mexico and said his government will maintain financial and fiscal discipline. However, López Obrador’s procession towards victory has alarmed many investors and business leaders, especially because it is still unclear how he will fund the policies he has championed without resorting to tax hikes or increased borrowing. 

Andres Manuel Lopez Obrador’s Policy Proposals
Government Spending Initiatives
– Universal coverage for telecommunications
– Doubled pension for the elderly
– Austerity measures, with a zero-deficit goal (without tax increases)
Institutional Initiatives
– Respect the separation of power and maintain the independence of the central bank of Mexico
– Amnesty for those involved in the drug business
– Fix root causes of violence, such as poverty and inequality
Structural Reforms
– Energy reforms will be scrutinized for any corruption or illegality, but otherwise contracts will be honored
– Renegotiate NAFTA, but opposed to increasing tariffs
– Free trade zones will be instituted on the U.S. border
– Increase subsidies for the agricultural sector

In terms of trade, López Obrador, a onetime NAFTA skeptic who moderated his views in his third run at the presidency, has said that he wants a NAFTA deal that is good for Mexico. Just one day after winning the election, López Obrador spent half an hour on the phone with President Trump covering different issues from border security to the NAFTA renegotiation process. According to reports, López Obrador plans to accompany the current government in this negotiation and has vowed to support the signing of the agreement. So far, López Obrador’s assertions that he will not turn the NAFTA negotiations upside down has helped mitigate investor worries, analysts say. However, it remains to be seen how López Obrador and President Trump will get along now that López Obrador has been elected or when he takes office. 

Some analysts have also argued that the election of López Obrador may in fact pave the way for at least some progress on the NAFTA negotiations. While U.S. businesses have concerns about López Obrador, the Trump administration’s approach to NAFTA appears to coincide with some of López Obrador’s economic priorities. For example, his administration will certainly be more receptive to Washington’s push to raise labor standards and wages in Mexico compared to the government of outgoing President Enrique Pena Nieto. 

With a long transition period that does not see López Obrador take office until December 1, it is unlikely that a NAFTA deal will be struck down anytime soon. The U.S. has mid-term elections in November, which means the summer will be campaign-heavy, reinforcing the belief that a renovated NAFTA will not take shape until 2019. 

Amid varying levels of support or condemnation from the primary industries and major political actors in the three countries, it will be essential to remain abreast of individual developments in this trade dispute as it impacts daily trade, industrial trends, and politics to 2019 and beyond. In Canada, Trudeau’s willingness to work towards a new NAFTA offers cautious optimism in light of growing pressure to uphold the Canadian national interest, whereas in Mexico, López Obrador’s pragmatic approach offers important clues about his vision for NAFTA as he takes office. 

Part 2 of this report, to be published next week, will elaborate on the possible scenarios for concluding the NAFTA talks and how a potential NAFTA collapse could affect supply chains. Our analysis will take a closer look at the potential effects of the different NAFTA scenarios for the automotive, aerospace, technology, chemicals and apparel industries. 

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