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The U.S. Administration’s Need for a NAFTA Win They Likely Won’t Get

Wed, 06/27/2018

The Fate of NAFTA in 2018 and Beyond

By J.P. Carroll, Account Executive, MSL

With the 2018-midterm elections less than six months away, it is increasingly difficult for Congress to pass significant legislation. Of particular concern, the Trump Administration has yet to reach an agreement with Canada and Mexico to modify the terms of the North American Free Trade Agreement (NAFTA). Negotiations have been ongoing since August of last year, and have past the May 17 deadline to allow sufficient time to secure congressional approval.

The President has repeatedly and publicly emphasized his desire to renegotiate NAFTA. Though the three-country trade bloc supports close to 14 million American jobs, ultimately, President Trump ran on a campaign placing the blame for domestic economic malaise on excessive foreign trade entanglements. As excitement over the Administration’s tax reform law has fizzled, announcing a successful renegotiation of NAFTA is a must-win for his Administration ahead of the midterms.

However, the Trump Administration faces several headwinds that are rapidly diminishing their chances of achieving such a win.

  1. Steel Tariffs, U.S. Senators, and GOP Donors

Additional steel tariffs imposed on June 1 on Canada, Mexico, and the European Union, were the strongest signal yet that a new NAFTA deal is highly unlikely to occur before the U.S. midterm elections. While this abrupt policy shift could be seen as a tough negotiating tactic early on, ultimately it could backfire at this late stage of the negotiating process. In the aftermath of the steel tariffs decision, Canadian Prime Minister Justin Trudeau called the policy move, “insulting and unacceptable.”

In the United States, new divisions within the Republican Party have emerged over trade policy. Nebraska. Senator Ben Sasse having bluntly declared, “This is dumb.” Sasse went on to say that, “Europe, Canada, and Mexico are not China, and you don't treat allies the same way you treat opponents.” Additionally, the GOP donor class is not speaking with one voice as billionaires David and Charles Koch have announced that their political network will spend millions to oppose the president’s trade agenda, with a focus on recent tariffs.

  1. Winners of the 2018 Midterms: Canadian and Mexican trade delegations

Regardless of the election outcome in November, the fact that negotiations have gone beyond May 17 means that Canadian and Mexican negotiators may demand better terms from the Trump Administration, anticipating a new Congress in January 2019. Even if Republicans keep the U.S. House and the Senate, momentum will shift to the U.S. northern and southern neighbors.

  1. The AMLO Factor

Recent polling shows that Mexico City’s former mayor Andres Manuel Lopez Obrador (AMLO) is holding a steady and widening lead in the presidential race at 45 percent. AMLO’s support demonstrates a six-point boost over a poll taken last month. The frontrunner has made it clear that he wants ongoing NAFTA negotiations suspended because he does not trust incumbent President Enrique Peña Nieto to get a worthwhile deal for Mexico.

His double-digit lead in the polls along with the fact that he has not taken a specific stance on the future of the free trade agreement has the Mexican economy on edge. With only a month to go until Mexicans go to the polls, AMLO is likely to remain vague on the issue, as it has worked well for him so far. As the runner-up in the last two elections - partly because of protectionist trade proposals - AMLO has clearly learned that if you have nothing good to say, say nothing… until you win.

  1. Trudeau is Willing to Walk

Canadian Prime Minister Justin Trudeau does not have the same relationship with President Trump as he did with President Obama. The two leaders are farther apart on a variety of issues, including trade.

Trudeau recently stated, “No NAFTA is better than a bad deal, and we’ve made that very clear to the [U.S.] president.” Further emphasizing his firm policy stance, Trudeau said, “We are not going to move ahead just for the sake of moving ahead.”

The Canadian leader has now publicly set a rhetorical line in the sand, which will be hard to walk back in closed-door negotiations. From a messaging standpoint, talking tough could work for Trudeau as he is acutely aware that the clock is running out for both the U.S. and Mexico to make a deal – with upcoming elections in each country.

  1. Timing is Everything and Elections Matter

It is only because of then-candidate Trump’s strong advocacy for a more protectionist trade agenda that now-President Trump is pushing to revise the terms of the trade bloc. No other national leader – Prime Minister Trudeau or President Peña Nieto – considers renegotiating the landmark trade agreement a policy priority.  But President Trump faces a challenging referendum on his leadership in the mid-term election and the trade issue matters greatly to many in his base.

What’s Next: The Fate of NAFTA in 2018 and Beyond

Negotiations are stalled because of the upcoming elections in Mexico (July) and the U.S. (November). Were it not for these elections and the result of the U.S. 2016 presidential election, NAFTA would likely not be on the global trade agenda. As much as negotiators may wish to compromise, there is a central factor they cannot control: what message the Mexican and American people will send to their current leaders when they next go to the polls.

Therefore, given these dynamics and a broader sense of personal and national distrust among the parties, it is highly unlikely that a successful renegotiation of NAFTA will become law in 2018.

As a result, because of a lack of progress and narrowing options, President Trump may once again consider complete U.S. withdrawal from NAFTA. Such a step could attempt reframe the discussion with bold action aimed at demonstrating to midterm voters that he has delivered on a central campaign promise. Such an abrupt and complete withdrawal from NAFTA, with no replacement agreement, would generate enormous economic and political instability in the immediate aftermath and far-reaching future consequences that are difficult to predict.

Ahead of the midterms, it is critical for the Trump Administration and the Republican Party to speak with one policy message for voters if they are to mount a successful campaign to galvanize public support for a renegotiated NAFTA deal.

For undecided and independent voters, discord within the party – whether it is real or perceived – is harmful to the party’s reputation and ability to draw in others.


J.P. Carroll is an Account Executive in Washington D.C. whose work focuses on international clients in the geopolitical solutions group.

 

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