February 15, 2018 NAFTA's latest round of negotiations conclude with signs of slow progress The sixth round of North American Free Trade Agreement (NAFTA) negotiations concluded on January 29, 2018, in Montreal, Canada. According to press reports, the parties conveyed an overall optimistic tone following this round, but USTR Robert Lighthizer expressly noted that progress seems to be moving slow, in part due to the trilateral nature of the negotiations. Post-round commentaries from all three parties indicate agreement that progress was made in several important areas. For example, negotiations surrounding the "Transparency & Anti-corruption" Chapter were completed, providing legal certainty for further investment in NAFTA countries. "Customs procedures and trade facilitation" is another area moving forward that should improve overall efficiencies for the cross-border movement of goods. Additional topics showing progress include digital trade, telecommunications, and sanitary and phytosanitary measures, among others. According to press reports, however, no agreement was reached on a number of sensitive issues. For example, the parties continue to debate the level of regional value content required for originating automotive goods. The US has suggested increasing North American content to 85% (versus the current 62.5%) and including a new separate requirement for a minimum 50% US content component; Canada and Mexico have reportedly rejected this proposal due to envisaged difficulties in actually meeting that threshold. As an alternative, Canadian negotiators suggested increasing amounts included in regional value content by taking the value of the materials used in the production of vehicles into consideration, as well as the value of software research and development costs incurred in NAFTA countries. The US initially rejected this approach at the conclusion of these latest negotiations, saying that it could lead to less regional value content that what is included today. It is our understanding from press reports that Mexico is planning to further review Canada's proposal to determine if it remains a viable option. In addition to the automotive rules of origin, disagreement continues over the "sunset clause" previously proposed by the US. This clause would cause NAFTA to expire automatically every five years, unless the parties expressly agree to extend it. Mexico has reportedly proposed a five-year reassessment, rather than the automatic expiration. No agreement, however, has been reached yet by all of the parties. Other areas of continued disagreement include the US proposal to eliminate Chapter 19 (i.e. dispute settlement mechanism for antidumping and countervailing duties), which Canada opposes, as well as the elimination or "opt-out" possibility from the "Investor-State Dispute Settlement" (ISDS). The latter, if eliminated, would effectively require investors to settle their disputes under each country's judicial system, rather than using arbitration. Canada and Mexico would reportedly prefer to eliminate the topic from NAFTA and pursue a bilateral ISDS. Finally, the parties have not agreed on the potential elimination of tariff preferential levels (TPLs) in textile and apparel goods and the roll-back of existing access to government procurement, among others. Two more rounds of negotiations are expected to take place before the end of March. The next round (Round 7) will take place in Mexico City from February 26 to March 6, 2018. The parties reportedly expect to move forward and finalize the renegotiation process before Mexico's Presidential election, which will take place on July 1, 2018. The complexity and sensitive nature of the remaining issues, however, could extend negotiations into 2019. To deal with the uncertainty surrounding the NAFTA negotiations, companies should better understand their NAFTA footprint to quantify their current supply chain and NAFTA benefits. This type of exercise can be achieved by leveraging customs import/export data to determine how sensitive the business is to NAFTA changes or potential termination. Specific questions need to be addressed regarding current regional value content requirements for products to qualify for origin, as well as potential changes to sourcing that may be required to preserve their NAFTA status. In sum, a strategic and proactive approach should allow companies to better deal with the continued uncertainties arising from the protracted NAFTA negotiation process. ———————————————
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