U.S., Mexico Sparring Before Nafta Talks Sets Dim Tone

The second round of talks to renegotiate the North American Free Trade Agreement begins here Friday under a dark cloud after both the U.S. and Mexico raised the stakes dramatically in recent days.

U.S. President Donald Trump has jolted the tone of the meetings with renewed calls to pull out of the 23-year-old deal linking the economies of the U.S., Canada and Mexico -- a drastic course U.S. officials said he came close to pursuing in April before backing down and agreeing instead to negotiate.

On at least four separate occasions since Aug. 22 -- in speeches, on Twitter, and a press conference -- Mr. Trump has raised the prospect, most recently on Wednesday.

"We're working right now on Nafta, the horrible, terrible Nafta deal that took so much business out of your state and out of your cities and towns," he told a cheering crowd in Missouri. "Hopefully we can renegotiate it, but if we can't, we'll terminate it and we'll start all over again with a real deal."

Mexican Foreign Minister Luis Videgaray told reporters this week that if the Trump administration begins the required six-month process of terminating the accord -- a move some Mexican and Canadian government officials say is a negotiating tactic -- Mexico would walk away from the talks.

"We don't think it would be the right path or a viable path to terminate the agreement just when we're in negotiations," Mr. Videgaray said.

Mexico's business and political classes are increasingly pessimistic over the Nafta talks. The front-runner in Mexico's 2018 presidential election, populist Andrés Manuel López Obrador, pledged Wednesday in an interview with The Wall Street Journal to cancel any deal that hurts Mexico if he wins.

A day earlier, Mexico's Economy Minister Ildefonso Guajardo told a Senate panel that Mexico was planning for "a scenario where Nafta doesn't exist," and later outlined what he called a "Plan B" if the U.S. withdraws from the accord.

The plan includes diversifying trade with non-U.S. partners, including grain producers like Brazil, Australia and Argentina, passing legislation to guarantee the safety of foreign direct investment in Mexico and falling back on World Trade Organization rules -- which set an average tariff of about 3.5% on goods exported from Mexico to the U.S. -- to govern trade with America.

"We can't be irresponsible and not have an alternative plan," Mr. Guajardo told reporters Tuesday.

Mr. Trump also resurfaced a dig at Mexico by insisting again this week that the country pay for a border wall between both nations and on Thursday his administration announced four winners of a bid to build prototypes. Tensions also ramped up over Mr. Trump's pardon to Joe Arpaio, the former Arizona sheriff and immigration hard-liner convicted of disobeying a court order to put an end to immigration raids.

The wall is such a humiliating topic in Mexico that the discussion only adds to political pressure on Mexican President Enrique Peña Nieto to withdraw from negotiations with the Trump administration, said Jorge Guajardo, a political consultant who once served as Mexico's ambassador to China (unrelated to the Mexican economy minister of the same name).

Mr. Peña Nieto's ruling Institutional Revolutionary Party, or PRI, faces stiff competition from both the right and left wings in the July presidential election, according to preliminary polls. The PRI is expected to announce its candidate later this year.

"No one wants to present a candidate who bowed to a bully on Nafta, the same bully who wants you to pay for a wall, who levels daily insults at Mexico," Mr. Guajardo, the former ambassador, said. "There's no political appetite right now to join with Trump or make any concessions to him, 10 months from an election."

Financial markets didn't react strongly to Mr. Trump's statements, with the peso remaining stable around 17.8 to the dollar most of the week.

The Trump administration officials who have been briefing Congress and business groups on U.S. strategy over the past week haven't raised the withdrawal threat, according to people familiar with those discussions, leading many of those stakeholders to conclude that it isn't a serious risk, at least in the near term.

A U.S. negotiator told one of these groups that the president is "giving the negotiators as much leverage as possible," according to two people in attendance.

And Mr. Trump's Treasury secretary, Steven Mnuchin, offers a more optimistic outlook than his boss, telling the Journal in an interview Thursday that he believed conversations with his counterparts in Mexico and Canada have indicated "there can be a win-win for all three countries."

Several of Mr. Peña Nieto's top aides, including chief of staff, Carlos Pérez Verdía Canales and chief spokesman Eduardo Sánchez, have been keeping Mr. Trump's 1987 best-selling negotiating book, "Trump: The Art Of The Deal," on their bedside tables in recent months to help them navigate relations with the U.S. administration.

"We don't know how much of what he's saying, he's saying because he is following the strategy of his book," said Jaime Zabludovsky, one of Nafta's original negotiators for the Mexican government, and now a private-sector trade adviser. "It's a fact of life, we're dealing with someone who is unstable."

The first round of negotiations, which took place in Washington in August, largely focused on procedural issues. This time around the talks will start to focus on specifics, although the Trump administration is still formulating policy on the most contentious issues and doesn't plan to make official proposals in those areas during the Mexico round, people briefed on those plans said.

"The great frustration here is the U.S. called this dance, but the administration has not come forward with any new proposals," said Eric Miller, a Washington-based trade consultant and global fellow at the nonpartisan Wilson Center.

Officials have said that they hope to craft all of the U.S. proposals in time for the late-September third round in Ottawa, and that the most intense negotiations will begin then.

Two issues that are expected to be especially contentious are rules of origin for components, and the Trump administration's proposal to eliminate the chapter 19 dispute resolution mechanism, which would give local courts in the three Nafta countries authority over dumping and subsidy cases, rather than a third-party mediation panel that was set up as part of the trade deal.

Canadian officials plan to engage in preliminary talks with their U.S. and Mexican counterparts on points of contention but have no plans to introduce proposals aimed at narrowing disagreements, people familiar with Ottawa's strategy said. They expect more detailed language from the Americans on addressing rules of origin and the dispute-resolution system to emerge in the third round in Canada, these people said.

Canadian officials have tried to play down some of the rhetoric from Mr. Trump about terminating Nafta, with Prime Minister Justin Trudeau saying the threat has surfaced before and the country remains focused on hammering out improvements to Nafta. A White House summary of a phone call between the two leaders Thursday said they both "stressed their hope to reach an agreement by the end of the year." A Trudeau spokeswoman said the two men discussed Nafta "briefly."

--Paul Vieira in Ottawa and Nick Timiraos in Washington contributed to this article.

Write to Robbie Whelan at robbie.whelan@wsj.com and Jacob M. Schlesinger at jacob.schlesinger@wsj.com

(END) Dow Jones Newswires

September 01, 2017 05:44 ET (09:44 GMT)