Good Progress' In Nafta Talks Though Wide Gaps Remain -- Update

By Jacob M. Schlesinger and Dudley Althaus Features Dow Jones Newswires

Negotiators working to redraw the North American Free Trade Agreement said they made "good progress" at talks this week in Mexico City, even though big gaps remain between the U.S., Mexico and Canada over the Trump administration's broader vision for overhauling the pact.

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During the fifth round of talks, negotiators said they moved closer to agreement on a range of areas like fixing continental rules for digital commerce and telecommunications. But deals remain distant on crucial issues like the regional content required in North America-produced vehicles or the framework for resolving trade and investment disputes.

"Significant differences remain on some key areas," Canadian Foreign Minister Chrystia Freeland, who is leading her country's negotiating team, told reporters in Ottawa. While Canada is open to "mutually-beneficial" compromises, she said, "at the end of the day we are always going to clearly defend our national interests."

President Donald Trump has branded Nafta a "disaster" for American workers and industry. His aides have put forth proposals that would go beyond simply modernizing the agreement -- a goal the Mexicans and Canadians share -- to imposing new rules to steer production from those two countries back to the U.S. Trump aides call it an attempt to "rebalance" Nafta.

Officials from Mexico and Canada repeatedly said during the five days of talks that wrapped up Tuesday that these proposals -- first put forth during the last round in October -- were "non-starters" and that they wouldn't negotiate over them.

Those disagreements continue to cast a cloud over the future of the rule book that has shaped North American trade for nearly a quarter-century, as Mr. Trump has repeatedly threatened to pull the U.S. out if he can't get his way in the talks.

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Negotiators are also leaving themselves little time to reach a deal before the end of March, a deadline set to avoid having talks run into the campaign season for Mexico's summer presidential and congressional elections. Officials said they would defer top-level meetings -- and the difficult conversations -- until the next round in Montreal in late January. In the interim, lower-level officials will meet in Washington in mid-December to continue grinding through less contentious issues.

This week's talks in Mexico were the fifth round since the three countries launched the process of rewriting Nafta in August, after Mr. Trump came close early in his administration to pulling the U.S. out. The renegotiation is the first major effort in Mr. Trump's "America First" campaign to reorient decades of U.S. trade policy and overhaul its trade agreements to focus less on cooperation with trading partners and more on ramping up unilateral enforcement actions to curb imports.

The mood among Nafta supporters has darkened considerably in the past month after Trump aides laid out in detail the ways in which they want to change Nafta, proposing that cars have 50% U.S. content to enjoy duty-free imports into the U.S., and seeking to slash Mexican and Canadian access to U.S. government projects.

Other controversial proposals would weaken or eliminate Nafta mechanisms for settling disputes among parties, and inject a "sunset" clause that would automatically terminate the agreement after five years unless the three countries expressly agree to keep it.

U.S. business groups have ramped up an extensive lobbying and public relations campaign aimed at persuading the Trump administration to soften its stance. Failing that, they want free-trade Republicans in Congress to try to rein in the Republican president. Business groups and economists have been churning out myriad studies warning of the dire impact a Nafta collapse would have.

The temperament in Mexico this week was more positive. U.S. Trade Representative Robert Lighthizer and his Mexican and Canadian counterparts decided to skip the meetings in Mexico, leaving the discussions to 700 midlevel trade negotiators in 30 different committees and encouraging them to focus on the portions of the pact where the three countries largely agree.

Many of those points were included in previous negotiations for the 12-nation Trans Pacific Partnership, which Mr. Trump pulled the U.S. out of at the start of his administration although his aides have used large portions of that as a template for modernizing Nafta.

Officials said progress was made in chapters on harmonizing regulatory practices, fighting corruption, food safety standards, and streamlining customs procedures.

There even appeared to be some tentative discussions feeling out compromise on some of the more controversial U.S. proposals. Mexican negotiators put forth a counterproposal to the U.S. "sunset" provision, rejecting the idea of an automatic termination clause, but offering more rigorous regular reviews of the pact.

And Mexican officials even signaled that, contrary to earlier suggestions, they no longer saw March as a hard deadline for completing talks. Negotiations could continue through and beyond the July elections, they said.

"In March, it won't suddenly be that we won't be answering the phones, or meeting with people," said a person close to the Mexican negotiators. This person noted that both Mexico and Canada changed governments during the course of TPP negotiations, and those talks continued.

Both sides derided a U.S. proposal that would limit their access to the American government procurement market to the dollar amount of their own, considerably smaller, markets. Mexico offered a mocking counterproposal that would limit U.S. access to the same tiny amount that Mexican firms win in U.S. government bids, a plan that would essentially nullify large contracts American insurance firms have to cover Mexican government workers. Canadian officials said the U.S. proposal would give them less access than Bahrain to the U.S.

The most difficult issue hanging over the talks is the American proposal aimed at shifting auto production back from Mexico to the U.S. American officials have signaled as their priority in these negotiations -- aimed at cutting the U.S. automotive trade deficit with Mexico that has ballooned under Nafta.

But that has prompted a fierce backlash from the American auto industry, which says the proposal would lower the efficiency of the U.S. auto industry -- heavily dependent on continental supply chains -- and force more production to Asia.

Mexican and Canadian negotiators have cited studies by U.S. industry backing those claims in rejecting the U.S. proposals.

"This is just a non-starter for us," said a Canadian official. "It won't just create economic damage for us, but it will do economic damage to the U.S."

"We've been extremely creative and extremely open to alternatives" to the proposals, said a senior U.S. official, who blamed the other partners for intransigence. "We're still looking for the Mexicans and Canadians to engage in substantive proposals."

--Paul Vieira in Ottawa and William Mauldin in Washington contributed to this article

Write to Dudley Althaus at Dudley.Althaus@wsj.com and Jacob M. Schlesinger at jacob.schlesinger@wsj.com

(END) Dow Jones Newswires

November 21, 2017 18:21 ET (23:21 GMT)