The emergence of China tariffs and a potential trade war over the past month have pushed NAFTA negotiations out of the media’s spotlight.
However, negotiations between the countries continue to progress. Members from each country’s negotiating team gathered in Washington D.C. last week to discuss open items. What are those items?
Automotive Rules of Origin
Automotive rules of origin have been the key sticking point throughout negotiations. The U.S. recently proposed a rule mandating 75% of an automobile’s components must originate in NAFTA countries for the vehicle to qualify tariff free. The current threshold is 62.5%, but Mexico and Canada both indicated an update to NAFTA automotive rules of origin may be needed after initially rejecting a U.S. proposal of 85%.
We believe the automotive rule of origin threshold will be increased. U.S. automotive parts manufacturers may benefit from a higher threshold, while car companies may need to relocate factories and reconfigure supply chains. Below are companies and sectors we’re watching:
- Kansas City Southern (KSU): Railroad transportation company with operations in the Midwest, Mexico, and Panama. Its an integral part of the U.S.-Mexico supply chain for the automotive, chemical, agriculture, and energy industries. In our view, KSU benefits from NAFTA continuation.
- Automakers: Ford (F), General Motors (GM), Toyota (TM), and Fiat Chrysler (FCAU) may be negatively impacted if management teams need to select new parts suppliers or build new factories to meet a higher NAFTA content threshold.
Investor State Dispute Settlement & NAFTA 5-Year Sunset Provision
Investor-state dispute settlement (ISDS) is the provision by which corporations can sue foreign countries for alleged discriminatory practices. The Trump administration has pushed for removing this clause, claiming it results in governments subsidizing foreign businesses. Canada, Mexico, and many U.S. and foreign companies are pushing to keep the provision, saying it protects corporations from being treated unjustly by foreign governments.
The Trump administration and U.S. trade representative Robert Lighthizer have also pushed for a five-year sunset provision of NAFTA. The provision would require the agreement to be renegotiated every five years. Similar to ISDS, Canada, Mexico, and U.S. and foreign companies are against this proposal.
If ISDS is removed or a five-year sunset clause is implemented, investment by foreign corporations across NAFTA member lines may be severely limited. For example, Mexico only recently opened its vast and promising oil fields to energy companies. With no ISDS in place, management teams at companies such as Chevron and ExxonMobil would be less likely to bid in the oilfield auctions.
In our view, ISDS should be included and the five-year sunset clause should be excluded.
Externally, all three NAFTA members have announced substantial progress over the past few weeks. Each side appears optimistic after nearly eight months of negotiations, and Canada and Mexico have expressed a desire to wrap up negotiations in the coming months. Even the Trump administration wants to finalize a NAFTA rewrite. It was a signature Trump campaign issue, and an updated NAFTA agreement could reenergize the Republican base.
To push NAFTA negotiations forward, the Trump administration sent representatives to Capitol Hill last week to brief congressional members. News surfaced afterward highlighting a potential Trump administration approach pushing for withdrawal from NAFTA before a final agreement is put in place. That would force Congress to pass whatever form of agreement is presented to them. For the record, we think this is political posturing and doesn’t happen.
But we are optimistic of a NAFTA agreement in principle by July, which would relieve some market uncertainty. Download the 2Q'18 Policy Tracker for more policy opportunities.
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