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Nafta Flashpoints : Issues to Watch as the Talks Unfold

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08/13/2017 | 01:15pm CET
By William Mauldin and Jacob M. Schlesinger 

The first round of negotiations over the North American Free Trade Agreement is scheduled to start Wednesday in Washington, D.C. President Donald Trump has called the pact, which took effect in 1994, a disaster for U.S. workers, a message that resonated in manufacturing states during his campaign. But businesses that have benefited from open trade with Canada and Mexico are urging the administration not to jeopardize the complex system of commerce among the three countries that has taken root under the agreement. Here are some issues to watch.

Timing

Trump aides say the president wants to move quickly, aiming to wrap up negotiations by early next year, to avoid having the talks getting caught up in the 2018 election campaigns in Mexico and the U.S. But that is an unusually rapid timetable, as major trade negotiations are usually measured in years, not months. Trade experts say the quick deadline might be feasible if the countries were only looking at minor tweaks, but Mr. Trump's desire for a major overhaul makes it particularly challenging.

Trade deficits

President Trump wants to stem, and possibly reverse, the shift of manufacturing from the U.S. to Mexico, and to reduce the bilateral trade deficit. He hasn't defined how he hopes to achieve those objectives, nor how hard he would push for them. Mexico and Canada are likely to resist language that defines success by individual countries rather than the bloc as a whole. Nafta backers say the pact has been successful in its original goals of integrating the continental economy, boosting trade and investment among the three countries, and making North American-based businesses more efficient and competitive against rivals in Asia and Europe. They say the talks should focus on ways to advance those goals.

Solving international disputes

Two systems of solving disputes through Nafta are already provoking fights. One, known as investor-state dispute settlement, is a process that allows an investor from one country to challenge a foreign government and win damages through an arbitration tribunal if the government is found to have violated the investor's basic rights. Many left-leaning groups and some conservatives want the arbitration provision removed from Nafta, but the Trump administration hasn't made its position clear. The second is a dispute system contained in Chapter 19 of Nafta that allows one country in the bloc to challenge tariffs imposed by another due to alleged dumping or subsidies. U.S. officials have proposed scrapping Chapter 19, but Canadian officials insist on keeping it.

Labor and the environment

Rules on labor and the environment were added almost as an afterthought in the original Nafta talks. More recent trade agreements have fully enforceable rules in the core of the deals to prevent companies from moving production offshore to cut corners. Trump administration officials say the U.S. and its neighbors are on the same page in boosting environmental and labor rules south of the border, and Mexico City has recently enacted labor reforms. But the issue could flare up if a revised Nafta is brought to Congress for ratification, since many Democrats want the highest level of international labor and environmental standards, while some business groups and allied Republicans would object to rules that add significant costs to companies.

Farm and forestry issues

The big U.S. agricultural industries -- corn, beef, pork -- are happy with the current version of Nafta and are focused mainly on preserving their duty-free, quota-free access to Mexico and Canada. But disagreements over agriculture can quickly turn bitter in trade talks. When Mr. Trump threatened to pull out of Nafta in April, some Mexican politicians warned that their nation could import more food from other Latin American nations instead of the U.S. Meanwhile, U.S. dairy farmers want Canada, which tightly controls dairy prices and imports, to open up its market. And separate, acrimonious talks on whether Canada's lumber exports should face tariffs or quotas could get lumped into Nafta if not solved separately.

Rules of origin

Free-trade agreements such as Nafta eliminate duties on products made in the trade bloc, but only if they are produced according to certain rules. To avoid cheating, products have to have a certain amount of content originating in the trade bloc to be shipped duty free to other members of the pact. Trump administration officials have said they want to tighten the rules of origin for the auto industry to bring back assembly and supplier jobs to North America. But leading auto makers and international suppliers say the Nafta rules are tight enough and that stricter rules could hurt profits or backfire by sending production abroad. Nafta talks may also address rules of origin for apparel and other industries.

Currency manipulation

Many economists say China and other countries appear to have derived trade benefits in the past by artificially holding down their exchange rates, effectively making exports cheaper and imports relatively more expensive. Lawmakers and some U.S. exporters support inserting enforceable rules into trade agreements to punish such behavior, but critics warn the rules could constrain a nation's monetary policy choices. The Trump administration is seeking to negotiate some sort of currency rules but hasn't spelled out its approach. Mexico and Canada haven't faced serious charges of currency manipulation, but the rules could serve as a template for future trade deals.

Immigration

A high priority for Mr. Trump has been reducing legal and illegal immigration, especially from Mexico. But Mexico would like to use the Nafta talks to further ease the free flow of workers between the two countries, seeking to expand the categories for professional visas granted to business people and executives.

Write to William Mauldin at [email protected] and Jacob M. Schlesinger at [email protected]

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