President Trump’s decision to delay talks on the North American Free Trade Agreement until after U.S. midterm elections will make striking a deal more difficult, businesses fear, since it allows more time for the three countries involved to chafe under a tariff dispute that the White House started.
And even if a deal is reached, winning Congressional approval may be impossible if Republicans lose their majority in either the Senate or the House of Representatives.
Not only are billions of dollars at stake, business confidence may suffer a significant blow if the president makes good on his threat to abandon the agreement with Canada and Mexico, as he has others, if he doesn’t get his way.
“Trump is willing to sacrifice national competitiveness in order to get what he wants,” said Duncan Wood, the director of the Mexico Institute at the Wilson Center. “There’s a willingness to play high-stakes poker.”
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Disrupting U.S. trade with Canada and Mexico, valued at $673.9 billion and $616.6 billion, respectively, would compound the damage from escalating tension over the White House’s wide-ranging tariffs. Economists, industry leaders and lawmakers from the president’s own party have warned the tactics risk a trade war that might undermine the effects of last year’s tax cuts and push the world into a recession.
Already, Canada and Mexico are retaliating against the U.S. for Trump’s decision to include them in his duties of 25 percent on steel imports and 10 percent on aluminum.
Both countries had initially been given exemptions, which Trump tried to use as a bargaining tool to complete NAFTA talks before the Mexican presidential election earlier this year and — maybe more consequentially — U.S. midterms.
Canada holds federal elections in October 2019.
“The administration definitely feels that the imposition of tariffs gives them leverage,” said Stephen Lamar, the executive vice president of the American Apparel & Footwear Association, a trade group that represents retail brands.
Any leverage is likely to be useful, given the administration’s unwillingness to compromise on changes such as adding a sunset clause to NAFTA, which businesses don’t want.
The provision would require the agreement to be renegotiated every five years. Trade deals are permanent by design to encourage companies to make long-term investments, Lamar said, and the sunset clause Trump wants would jeopardize the hyper-connected North American supply chain that has developed over the agreement’s two-decade lifespan.
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That’s because most companies make production plans well in advance and rely on stability in supply chains. Clothing companies order fabric nine to 12 months early, for instance, and auto manufacturers map production as far out as three to five years.
“Why are you going to invest if, within five years, the agreement could be ended by one party just walking away?” asked Jonathan Gold, the vice president of supply chain and customs policy at the National Retail Federation.
Without NAFTA, retailers and auto manufacturers would have little reason to invest in factories in North America, which could lead to the offshoring of jobs, Gold suggested.
Hun Quach, the vice president of international trade at the Retail Industry Leaders Association and an adviser to the U.S. Trade Representative’s Office, has attended almost every round of negotiation talks and shares Gold’s concerns.
“What we’re seeing as part of negotiations are problematic provisions that would hurt retailers’ operations,” she said.
The president has pressed, for instance, to increase the portion of automobiles that must be made in North America in order for them to be duty-free, a matter governed by “rules of origin.” Auto manufacturers, however, warned that meeting the new standard would be extremely tough and could disrupt supply chains.
“A NAFTA renegotiation under any circumstance is difficult,” Lamar said. “The proposals the president has put on the table make it vastly more complicated.”
Despite Corporate America’s concern over NAFTA renegotiation, there’s one area they agree needs modification. The deal should be modernized to cover the mushrooming digital economy, they say, which didn’t exist when the agreement was initially ratified in the early 1990s.
E-commerce and digital trade have become fundamental components of international supply chains, and the lack of provisions governing the industry in the current agreement makes cross-border operations more difficult, according to Sage Chandler, the vice president of international trade at the Consumer Technology Association.
