NAFTA Day #1 Recap…

Based entirely on what can be pulled from Government Accounts and media interviews of the participants involved in NAFTA negotiations, I’m going to try and summarize each day as it can be determined through those sources.

Additionally, for those who might be interested in a perspective I’m going to give a rating of my confidence that a tri-national agreement is possible.

On a scale of zero to 10 – where zero is NAFTA will dissolve and parties will be at irreconcilable differences, and 10 is confidence an agreement will be reached, at the end of Day #1, today, I’d asses the likelihood of an agreement at “3”.

Outlook not too good.

Canada, as expressed by foreign Minister Chrystia Freeland, appears determined to use NAFTA as a tool for Justin Trudeau’s social justice endeavors.  Gay rights, transgender rights, cultural sensitivity and climate change are at the very top of their priority list.  Further down the scale are rules on conflict resolution, and rules of origin.

Mexico’s position appears to be a ‘unity move‘ to align with Canada on mutual ideology in an effort to leverage the “status quo”; also the default position of Canada.  Mexican trade officials are exceptionally complimentary toward Canada’s Chrystia Freeland and openly divisive toward U.S.T.R. Robert Lighthizer.

Given the history here, Mexico appears to have no intention on complying with a trade agreement even if one is determined.  Mexico appears intent to simply factor the cost of compliance litigation into their economic and manufacturing equations. Go figure.

Combined Mexico and Canada are putting up a united front, and the U.S. trade team is presenting optical and verbal cues akin to ‘eye-rolls‘.

It would appear Canada and Mexico also understand the U.S./Trump no-lose position is to scrap the deal; and so CanaMex are leveraging themselves politically to try and force responsibility for fracture and failure onto Team U.S.A.

[NOTE: The full pdf of USTR Lighthizer’s goals is included at the bottom.]

The first round (of six) negotiations are scheduled to last 5 days, ending Sunday.

However, if day 2 through 4 are anything like Day #1, I wouldn’t bet on seeing round #2.

♦One of the more germane points of difference, something that actually has to do with trade, encompasses the “rules of origin” specifically within the Auto sector.

Currently, China ships a massive amount of Chinese manufactured component parts into both Canada and Mexico.  Those parts are then assembled and shipped into the U.S.  This process subverts the intent of NAFTA in that the agreement for manufacturing is supposed to encompass products actually manufactured within North America; as in manufactured within Canada, Mexico and The U.S.

The entire premise for “free trade” among the three North American nations is that products generated by, and manufactured by, the NAFTA partners would be “duty free”.

China has essentially subverted U.S. trade tariffs within the Auto Sector by using Mexico (mainly) as a destination for auto parts that are then merely assembled and shipped into the U.S. “duty free”.   If the end product came from China directly they would have to potentially pay an import tax as part of the U.S. China trade agreement.

Inside Canada and Mexico the assembly of Chinese parts to deliver a finished ‘end product’ destined to the U.S. market is a sector of their jobs and economy they wish to retain.  The U.S. is seeking to close the “rules of origin” loophole to ensure that only products actually manufactured within Mexico and Canada are part of the process.

U.S. Trade Representative Robert Lighthizer, and team, has a goal to end this “3rd party (China) dumping” of goods via this backdoor exploitation.  Canada and Mexico obviously want to retain it.

The current “rules of origin” are generally being discussed around the “Auto Sector”, but the same basic premise pertains to other products.  China can ship unassembled appliances into Mexico and Canada, or furniture etc., and gain the same NAFTA benefit with the Northern and Southern U.S. neighbors simply doing the assembly work.

In these examples Mexico and Canada workers benefit from the jobs, but there’s no economic value within the United States.  The U.S. looses the tariff, or duties, and U.S. businesses, both in parts and complete finished goods, are undercut and subsequently lose the manufacturing jobs to either China, Mexico or Canada.

Therefore the “rules of origin” specify how much of a finished product must be made entirely in North America in order to qualify for NAFTA “free trade”.

(Via CNBC) Without rules of origin, non-member countries [China] can skirt around tariffs and other trade barriers by exporting goods through the lowest-tariff member country [Canada or Mexico] and into the other member nations [U.S.A.].

To avoid this form of arbitrage, origin rules establish that at least a fraction of goods covered by a free trade agreement have to be produced within the NAFTA region.

Among the administration’s goals is to “update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.”

Adjusting rules of origin holds particular significance for the auto industry. Currently, 62.5 percent of a vehicle’s content must be made within the NAFTA region to avoid tariffs. (link)

One comment on “NAFTA Day #1 Recap…

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