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The Biggest Obstacles for NAFTA Renewal

  • Sonia Monárrez Professor of Business Intelligence, EGADE Business School
October 13, 2017

The first round of Free Trade Agreement (FTA) renegotiations have begun amidst heightened tensions. Instead of seeing it as an opportunity to strengthen integration in the region to make North America one of the most competitive blocks in the world, the initial rhetoric of the United States has intensified the negotiations, principally in relation to rules of origin, dispute settlement mechanisms, labor issues, and several other burning matters that could intensify the discussions. 

Let’s take a look at some of the most contentious points, which could have far-reaching implications:

  • Rules of Origin: These are the regional content requirements that products need to meet in order to be considered as “duty free” for the countries that make up the agreement. Consider the automotive industry, for example, which is one of the most important trade sectors in the region. A car needs to have at least 62.5% of inputs made in the region in order to benefit from it. The United States is looking to increase that percentage to have a higher number of products manufactured in Mexico.  
  • Dispute Settlement Mechanisms: This refers to the processes that countries use to resolve commercial disputes in the region. Currently they are resolved impartially by a binational panel, however the United States wants to incorporate changes that allow them to make decisions unilaterally.   
  • Labor Issues: This is another cause of conflict. While Canada favors immigration with a system based on clear rules that incentives candidates qualified in specific areas, Mexico is interested in temporary migration agreements and a larger opening that allows a more flexible flow of migration. On the other hand, the stance of the United States is a more closed one, especially in relation to Mexican immigrants.    

The agreement needs to be modernized or adapted to the current and future circumstances of the issues stated. Canada and Mexico both agree that the dispute settlement mechanisms should not be removed, and that no change that is introduced concerning rules of origin should favor to just one sole member. However, work needs to be done to simplify procedures and grant more flexibility so that the rules can be adapted to future needs.  

In the coming months, it is critical for both the Mexican and Canadian teams to work together to achieve a common goal. Both Mexico and Canada are looking for an inclusive and responsible agreement that includes environmental issues, gender perspective, and the standardizing of working conditions.

The stances of Mexico and the United States are similar when it comes to the telecommunication and finance sectors, important issues that both could agree on. These sectors as well as digital trade and energy, can help to create a unique opportunity for growth and integration in the region.

The next few months of negotiations will be difficult. Mexico and Canada are strengthened by their similar objectives, but Mexico must also look for common points of interest with the United States, and focus on the issues analyzed at the negotiation table. They need to look beyond the information given by the media and the likely belligerent rhetoric of President Trump.