Trump Administration Notifies Congress of Intent to Launch Nafta Talks -- 2nd Update

By William Mauldin Features Dow Jones Newswires

The Trump administration informed U.S. lawmakers that it intends to launch formal negotiations on overhauling the North American Free Trade Agreement, a gamble by President Donald Trump that he can win concessions from Canada and Mexico and push a deal through Congress.

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Mr. Trump, who called the trade deal a "disaster" on the campaign trail, threatened to pull the U.S. out of Nafta as recently as last month and is signaling he'll bring maximum negotiating leverage to the talks, potentially pitting Canada against Mexico in ways that could significantly alter the 23-year-old pact.

In a letter to congressional leaders, U.S. trade representative Robert Lighthizer said the administration will start talks in as soon as 90 days, in line with congressional rules on negotiating trade deals subject to expedited consideration by lawmakers.

Mr. Trump has vowed to put workers first and make major changes in Nafta. Still, Canada and Mexico have only limited room to make deep concessions given their own domestic political situations, as well as the risk that Washington's political divisions -- and Mr. Trump's trade-related threats -- could derail a deal.

"To say that there are a number of distractions for the White House and the entire administration is an understatement, so that does create an anomaly in what would otherwise be a straightforward negotiation," said Peter MacKay, former Canadian foreign minister and partner at the Toronto office of law firm Baker McKenzie.

Mr. Lighthizer, confirmed by the Senate only last week, said he hopes to wrap up negotiations by the end of the year, a key goal for officials worried Mexico's presidential election next year could weigh on the talks.

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Mr. Trump was elected in part with a message of regaining American manufacturing jobs, and Mr. Lighthizer said Thursday that manufacturing will be a key focus of the talks.

Many economists and trade experts say it will be hard to structure a trade deal that brings back labor-intensive manufacturing jobs, especially when wages are so much lower south of the U.S. border. Labor standards, included as an annex to the original Nafta deal as implemented in 1994, will be front and center in this year's talks, Mr. Lighthizer said.

Mr. Lighthizer's assertion that Nafta has been bad for American manufacturers will be hotly contested by the U.S. business community, which has argued that the pact has done a lot to sustain some U.S. factories by creating more efficient continental supply chains that allowed North American firms to better compete globally.

A group representing the Detroit auto makers -- the American Automotive Policy Council -- said the talks are a "significant opportunity to update Nafta in a way that will increase the export of more American vehicles and auto parts." Although many Detroit parts suppliers have moved to Mexico, economists say Nafta has helped the North American auto industry as a whole compete against Europe and Asia..

In Canada, officials have repeatedly said they stand ready to begin formal talks on Nafta, with the aim of making improvements to the decades-old pact. Canada has much at stake in renegotiations, as three-quarters of all Canadian exports -- or the equivalent of 20% of its total economic output -- are bound for the U.S.

"Canada has said from Day One is that we are ready to come to the table at any time," said Chrystia Freeland, Canadian foreign minister.

Mexican officials sent notice to lawmakers months ago that they are ready to begin talks. Mexico has the most at stake in any renegotiation, since exports account for more than a third of its economy, and 90% of its exports are manufactured goods, mostly sent to the U.S.

Mr. Lighthizer said he hopes to preserve the existing, trilateral structure of Nafta but will likely negotiate separately with Mexico and Canada on many issues. But he didn't exclude major changes in the pact if negotiators reach an impasse. "If that proves to be impossible, then we'll move in a different direction," he said.

Business groups and Republican congressional leaders on Thursday underscored their preference for keeping a three-way trade framework, despite the Trump administration's backing for bilateral deals. Canada and Mexico also want to avoid being divided in the negotiations.

"We do have a preference: the agreement is trilateral and should continue to be a trilateral platform," Mexican Foreign Minister Luis Videgaray told reporters alongside U.S. Secretary of State Rex Tillerson in Washington.

The 2016 political season brought a deep skepticism of U.S. trade policy, and the Trump administration will have to strike a fine balance if it wants to win the backing of a majority of lawmakers in the House and Senate, required for any final deal that significantly overhauls Nafta.

Mr. Trump's campaign rhetoric is actually more closely aligned with that of Democratic lawmakers, labor unions and environmental groups, who want the toughest possible trade rules to prevent what they see as unfair competition from Mexico's manufacturing sector.

But it isn't clear how many Democratic votes Mr. Trump can count on, and some Democtats are already complaining that the administration isn't putting enough emphasis on labor and environmental standards or new rules to balance trade with Mexico.

"For those of us who believe that U.S. trade policy and Nafta need fundamental reform, this notice is very disappointing," said Rep. Richard Neal of Massachusetts and Rep. Bill Pascrell of New Jersey, two Democrats on the House Ways and Means Committee, which oversees trade.

Republican lawmakers, on the other hand, are more likely to appreciate the existing free-trade provisions of Nafta that benefit farmers and big businesses.

The Republican chairman of that panel, Kevin Brady of Texas, said he looks forward to working with the administration to strengthen Nafta "in a seamless way and ensure that we retain the current benefits."

An earlier draft letter from the administration listed several controversial provisions that could be included in Nafta talks, including a mechanism that would apply tariffs to a flood of imports and a potential tax that Trump officials argue would level the playing field with Mexico's value-added tax.

But the letter sent Thursday doesn't go into specifics on negotiating objectives. Mr. Lighthizer said the objectives will be spelled out at least 30 days before Nafta talks start, in line with a 2015 trade law that lays out Washington's procedures for negotiating and approving deals.

Congress also spelled out its own objectives in the 2015 law, known as fast track or trade promotion authority. One priority is considering the effect of countries' currency moves on international trade, and Mr. Lighthizer told senators this week he is considering the inclusion of rules preventing trading partners from manipulating their currencies.

Another priority for the administration is tightening so-called rules of origin that control which products are eligible for duty-free trade in North America. For example, raising the required proportion of North American parts used in making an automobile could squeeze out some Asian auto parts used in American-built cars.

Mr. Lighthizer said he is seeking to resolve thorny disputes with Mexico on sugar and with Canada on softwood lumber before the Nafta negotiations begin in earnest, but he said it is possible those issues could become part of the talks.

--Jacob M. Schlesinger, Paul Vieira and Robbie Whelan contributed to this article.

Write to William Mauldin at william.mauldin@wsj.com

WASHINGTON -- The Trump administration took the first step toward renegotiating the North American Free Trade Agreement, plunging into a battle that pits some Republicans and industry supporters of the pact against Democrats and some of the president's most ardent backers.

In a letter to congressional leaders on Thursday, U.S. Trade Representative Robert Lighthizer said the administration would start talks on the 23-year-old deal in as few as 90 days.

The negotiations stand to put President Donald Trump into a politically tight spot at a time when the current political turmoil already threatens to hold up parts of his agenda.

While both sides concede Nafta needs updating, the congressional Republicans most likely to support a final deal would rather see a tweaking, since a significant overhaul or major new provisions could end up eroding the benefits companies and farmers get from reliable, duty-free exports to Canadian and Mexican markets.

"There is no question that Nafta has been tremendously successful," said Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee, which oversees trade. "We look forward to working with the administration to strengthen the agreement in a seamless way."

Business groups on Thursday warned the Trump administration to avoid putting Nafta's benefits at risk.

"First, we must do no harm," the U.S. Chamber of Commerce said.

But many Democrats say they will try to hold the administration to its promises on labor and environmental standards, a ban on currency manipulation and novel rules to bring back manufacturing jobs.

"For those of us who believe that U.S. trade policy and Nafta need fundamental reform, this notice is very disappointing," said Rep. Richard Neal of Massachusetts and Rep. Bill Pascrell of New Jersey, two Democrats on Mr. Brady's committee, explaining they don't think potential policy changes will go far enough.

The split in Congress -- which must approve any major overhaul of Nafta -- mirrors a division in the Trump administration between traditional business-friendly Republicans and the economic nationalists who frequently join with liberals in calling for measures at the border to protect American workers from unfair competition. Just three weeks ago, Mr. Trump threatened once again to pull out of the deal altogether.

Like most U.S. congressional Republicans, Mexican and Canadian officials are also wary of major changes that could hurt their exports to the U.S. or even alter the three-way framework that underpins Nafta.

"We do have a preference: The agreement is trilateral and should continue to be a trilateral platform," Mexican Foreign Minister Luis Videgaray told reporters at a briefing with U.S. Secretary of State Rex Tillerson in Washington. Chrystia Freeland, Canada's foreign minister, told reporters in Ottawa that the talks "need to be conducted in a trilateral fashion," and that officials there are "ready to roll up our sleeves."

Mr. Lighthizer said he hopes to preserve Nafta's existing structure but that many of the negotiations would be conducted bilaterally. "If that proves to be impossible, then we'll move in a different direction," he said, not ruling out changes to Nafta's structure.

Canada and Mexico have only limited room to make deep concessions given their domestic political situations, and Mexico has elections next year that could complicate any protracted talks. Washington's current political upheaval -- and Mr. Trump's trade-related threats to neighbors -- could also derail a deal.

"To say that there are a number of distractions for the White House and the entire administration is an understatement, so that does create an anomaly in what would otherwise be a straightforward negotiation," said Peter MacKay, former Canadian foreign minister and partner at the Toronto office of law firm Baker McKenzie.

Mexican officials sent notice to the country's lawmakers months ago that they are ready to begin talks. Mexico has the most at stake in any renegotiation, since exports account for more than a third of its economy, and 90% of its exports are manufactured goods, mostly sent to the U.S.

Héctor Larios Córdova, a senator from the Mexican border state of Sonora, said the notification is "good news, because Mexico has been caught in tremendous uncertainty since the beginning of the new U.S. administration."

Mr. Trump was elected in part with a message of regaining American manufacturing jobs, and Mr. Lighthizer said manufacturing would be a key focus of the talks, which he said he hopes to wrap up by the end of the year. Labor standards, included as an annex to the original Nafta deal as implemented in 1994, will be front and center in this year's talks, Mr. Lighthizer said.

While many business and farm groups emphasized the need for preserving their current access to markets in Canada and Mexico, the technology sector and some other industries are looking to benefit from new provisions.

A group representing Detroit auto makers -- the American Automotive Policy Council -- said the talks are a "significant opportunity to update Nafta in a way that will increase the export of more American vehicles and auto parts."

Although many Detroit parts suppliers have moved to Mexico, economists say Nafta has helped the North American auto industry as a whole compete against Europe and Asia. Stronger rules on which cars can be traded duty-free could add to their advantage.

An earlier draft letter from the administration hinted at several controversial provisions that could be included in Nafta talks, including a mechanism that would apply tariffs to a flood of imports and a potential tax that Trump officials argue would level the playing field with Mexico's value-added tax. The letter actually sent to Congress, however, doesn't go into specifics on negotiating objectives. Mr. Lighthizer said the objectives will be spelled out at least 30 days before Nafta talks start, in line with a 2015 trade law that lays out Washington's procedures for negotiating and approving deals.

Congress also spelled out its own objectives in the 2015 law, known as fast track or trade promotion authority.

One increasingly popular request is that U.S. officials consider the effect of countries' currency moves on international trade. Mr. Lighthizer told senators this week he is considering the inclusion of rules preventing trading partners from manipulating their currencies.

Mr. Lighthizer said he is seeking to resolve thorny disputes with Mexico on sugar and with Canada on softwood lumber before the Nafta negotiations begin in earnest, but he said it is possible those issues could become part of the talks.

--Jacob M. Schlesinger, Paul Vieira and Robbie Whelan contributed to this article.

Write to William Mauldin at william.mauldin@wsj.com

(END) Dow Jones Newswires

May 18, 2017 20:13 ET (00:13 GMT)