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USTR scraps official NAFTA round eight this week, hosts ministerial meetings instead

April 04, 2018 – Jenny Leonard

World Trade Online

U.S. Trade Representative Robert Lighthizer has decided against hosting an official eighth round of NAFTA negotiations and instead will hold ministerial meetings with his counterparts in Washington, DC, this week, hoping to make progress in the most sensitive areas and lay the groundwork for an agreement in principle by mid-April, sources close to the talks tell Inside U.S. Trade.

Canadian Foreign Affairs Minister Chrystia Freeland and Mexican Economy Secretary Ildefonso Guajardo will meet separately with Lighthizer, these sources said, with a trilateral meeting set for Friday. Both officials will come to DC with their chief negotiators and other senior political staff as well as several chapter leads, leaving some observers to argue this week’s meetings are akin to a negotiating round “but no one wants to call it that,” one source said.

“Effectively a round is occuring right now with so many tables meeting,” another source said. “It’s a round but it’s just not called that.”

The three countries are expected to flesh out an agreement in principle that President Trump, Prime Minister Justin Trudeau and President Enrique Peña Nieto could announce at the Summit of the Americas in Lima, Peru, which begins on April 13. Sources told Inside U.S. Trade Lighthizer will accompany Trump to the summit.

USTR’s chief agricultural negotiator, Gregg Doud, told stakeholders this week that the White House was pushing for an agreement in principle by then, people briefed on the conversation said.

The Lima summit will be the first and likely the last event the three heads of state will participate in together, as Mexico will elect a new president on July 1. Two planned state visits between Peña Nieto and Trump were canceled after Trump repeatedly insisted Mexico would pay for a planned border wall.

USTR for weeks has sidestepped questions posed by congressional staff, stakeholders and its trading partners about the timing and logistics of an eighth round, but sources said Lighthizer told his counterparts weeks ago that he was opposed to holding another formal negotiating session and said he prefered finalizing any outstanding issues at the ministerial level. USTR did not respond to a request for comment.

Some said it was not uncommon for ministers to handle the final stretches of negotiations this way and to seek a shortcut to a deal with so little time left in the political calendar.

“USTR can construe a mini-ministerial as news if it wants to build the narrative that the parties are close enough to conclusion to no longer need to conduct regular rounds and now are at a stage where ministers are engaging on final trade-offs,” one source said.

“If so,” the source added, “the agenda will be about the key sensitive issues and trade-offs between them.”

Some congressional staff members and stakeholders, on the other hand, believe the tactic is risky and flawed given what they perceive as a number of “process fouls” USTR has committed throughout the NAFTA negotiations — and given the proposals the administration put forward over the objections of key lawmakers and some administration officials.

A ministerial-level push without Capitol Hill involved is especially risky when engaging in final trade-offs, one aide contended, stressing that in a “normal” negotiation USTR is supposed to consult with Congress on compromises to gauge their feasibility for members and stakeholders as well as their impact on the whip count.

Republican and Democratic aides, however, said Lighthizer’s strategy to cut out Congress and stakeholders made sense because he is “calling [the Republicans’] bluff,” as one put it.

Lighthizer is facing pushback from the chairmen of the key congressional trade committees on a number of proposals he has advanced in the talks with Canada and Mexico, but observers from both sides of the aisle said they doubted the chairmen or a majority of GOP members — despite public criticism of Lighthizer’s approach — would in the end reject a deal if the president backed it.

Sources said the talks to date have advanced well in areas where all parties saw a need for modernization, but that negotiators remained stuck on a number of chapters in which USTR has not signaled it could make compromises.

Mexican and Canadian sources as well as many key players in the U.S. business community have faulted the Trump administration for what they see as a lack of political direction in the NAFTA talks.

These sources said direction from Lighthizer and his political team was needed to clear many outstanding roadblocks — either in chapters in which the countries have to hammer out so-called “endgame issues,” or in areas where USTR’s initial proposals were not workable for its trading partners but career staffers have not received guidance to move off those approaches.

“Canada and Mexico have nothing useful on landing zones,” one outside adviser said. “It seems to still be ‘take it or leave it.’”

One source close to the talks said the ministerial meetings this week “should lead to clear instructions for further technical meetings with all groups under one roof.” The source added that it was “imperative to have intense technical meetings if we are to advance.”

Many outside advisers and observers agreed that even if an agreement in principle was announced this month, a large amount of technical work would remain before a substantive agreement could be reached — and getting there, they say, will require unprecedented engagement from USTR at the negotiating table.

“The onus is on USTR to at least — they don’t have to back off their positions — but at least show some flexibility on the issues,” one private-sector source said. “I think there could be some positive momentum here, but real progress really depends on USTR.”

Mexico’s chief negotiator, Kenneth Smith Ramos, tweeted on Tuesday that the “NAFTA modernization process is entering a phase of intensive Ministerial engagement. #MX will continue to work constructively and it will be the substance of the #negotiation that drives any potential conclusion. Goal: a stronger and modern #NAFTA.”

Sources said the Trump administration, on the other hand, appeared to have been exerting pressure for a compressed time frame in an attempt to arrive at its desired conclusion — including extracting concessions from its neighbors in return for permanent exemptions from Section 232 tariffs on steel and aluminum.

Sources told Inside U.S. Trade last week that Lighthizer had been pushing for an agreement in principle to be announced by March 31 and that he wanted it finalized by May 1, the day Mexico and Canada’s exemptions for Trump’s steel and aluminum tariffs expire.

Mexican Economy Secretary Ildefonso Guajardo last month rejected the end-of-March deadline and the pressure that would come with an agreement in principle announced despite a raft of unresolved issues, they said. Instead, the three countries agreed to close out seven additional nearly completed “modernization” chapters by the end of this week.

A private-sector source said “those are not what you consider deal-breaking chapters, of course,” but several sources said wrapping up those chapters would send a positive message and lay more groundwork for an announcement at the Lima summit.

Sources disagreed on how much advancement would be beneficial to congressional Republicans who would be forced to make NAFTA an election issue and defend a deal that might fall short of some of their demands.

One source argued that even if the time line Lighthizer was pushing for was “partially aspirational, it shows the leverage USTR has over our trading partners with a crazy president.”

“In a way, Lighthizer has leverage on Trump to move quickly and be reasonable,” the source said. “If Trump can say he has achieved a good NAFTA it might help with the midterms. And Lighthizer can say it’s safer to get NAFTA done right now when [Republicans] control all the levers of power.”

Another said an agreement in principle was “the best thing that could happen” to those members because it would “keep the president happy” and would allow the countries to put the talks “on ice” for the foreseeable future and avoid making NAFTA a possibly “toxic” election issue.

An area that will be closely watched by many this week is NAFTA’s automotive rules of origin. USTR late last month floated a revised proposal that would factor wages into the regional value content metric that determines if a car qualifies for duty-free treatment under NAFTA.

Talks on the new autos proposal to date have been conducted largely bilaterally, and both Mexico and Canada have said they must further analyze the offer and consult with their domestic industries. People briefed on USTR’s proposal said it did not include a specific methodology and was lacking important information on how it would be implemented and administered — and that negotiators and stakeholders were looking for more detail on those in the meetings this week.

“Successful auto negotiations will depend on achieving clarity on rules of origin because the speed and scope of the industry makes it impossible to administer without them,” Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association, told Inside U.S. Trade. “The question that remains unanswered is whether we are at a stage that the three parties can confidently provide that to the sector.”

Guajardo on Monday said USTR was looking for a “quick solution” and that the negotiating teams “made a lot of progress, but on the complex issues, well, it looks like there’s a willingness to be flexible.”

Leading up to the Lima summit, there could be “the principal lines of understanding for solving complex issues,” he added, but the three sides are “not there yet.”

“The ministers need to get working together to get things settled,” he added, according to Reuters.
One private-sector source said Guajardo’s comments were “essentially acknowledging reality.”

“They want a milestone. They buy themselves huge time and scope to work on technical details,” the source said of a potential announcement of an agreement in principle. “But there is a big gap between desire and execution.”

Over the weekend and earlier this week, President Trump has used Twitter to bash NAFTA and link the negotiations to other issues. This weekend, he tied the talks to immigration reform and threatened to use NAFTA as a bargaining chip should Congress not act immediately.

“Mexico is making a fortune on NAFTA…They have very strong border laws — ours are pathetic,” Trump tweeted. “With all of the money they make from the U.S., hopefully they will stop people from coming through their country and into ours, at least until Congress changes our immigration laws!”

But some sources question how credible those threats could be, especially in light of the administration’s recent trade actions against China — remedies that have already spurred Beijing to retaliate against U.S. exports and threaten more moves.

“As the trade war with China commences, it’s inconceivable that Trump could also withdraw from NAFTA,” said Jamie McInerney, executive director of the Trade Leadership Coalition, an industry-backed pro-trade and pro-NAFTA organization. “Doing so would mean that U.S. farmers lose access to their three largest export markets — China, Mexico, and Canada — all at once. This could throw the agricultural economy into a full-on depression and would certainly incite further sell-offs in the stock market.”

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