What U.S. Wants From Nafta Talks

President Donald Trump's trade team this week will begin the complicated task of rewriting the sprawling North American Free Trade Agreement, the 23-year-old pact he has branded a "disaster" for U.S. factory workers. The negotiators' challenge: finding a way to address workers' concerns while keeping the promise to "do no harm" to the large number of industries and communities that have benefited.

The negotiations with Mexico and Canada, starting Wednesday in Washington, mark Mr. Trump's first concrete attempt to translate his strong protectionist campaign rhetoric into policy.

Early signs have been largely reassuring to business leaders and trade partners, who have worried that the president's demands would uproot rules that are by now embedded in the continent's commercial ecosystem. They say there is much they all can embrace in the Trump proposals, some of which borrow from the Obama-era Pacific trade deal that Mr. Trump killed on his first full day in office.

"While there are tough issues here for the other countries, I don't see any obvious poison pills," William Reinsch, a former Clinton administration trade official who has run a free-trade advocacy group for 15 years, wrote in a recent essay.

The question is whether U.S. negotiators can extract enough concessions from Mexico and Canada so that Mr. Trump can declare victory to his factory-worker base without upsetting his business backers, who have lobbied intensively to preserve the agreement.

Few think that will be an easy needle to thread. The U.S. has floated some proposals tinged with Mr. Trump's "America First" philosophy that the two Nafta partners and many U.S. multinationals say they can't accept. Those include a demand to give the U.S. more freedom to unilaterally restrict cross-border trade if it thinks foreign firms are cheating, and to tighten barriers against cheap imports from outside the region.

And while Mr. Trump has agreed to renegotiate Nafta rather than pull out -- as he came close to doing in April -- he repeatedly says he is keeping that option open if he's unhappy with how the talks unfold.

"Nafta's a horrible deal for the United States," the president told The Wall Street Journal in a July 25 interview. "We're in the midst of a renegotiation right now so we'll see," he added. "Maybe we'll have to terminate it."

Mexico and Canada are entering the negotiations mainly playing defense, making few demands other than to try to protect and modernize an agreement that has generally been more popular in those countries than in the U.S.

"Our first goal is to keep the deal in place," said Moisés Kalach, a textile businessman who leads a Mexican private-sector campaign to defend Nafta in the U.S. "Our second goal is, don't destroy the value chains that have led to so much growth over the last two decades."

The partners have set an ambitious timetable, saying they hope to wrap up talks by early next year, ahead of Mexican and U.S. elections that could complicate ratification of a new agreement. That would be an unusually rapid pace: The original Nafta took three years to complete. This week's opening round of negotiations runs through Sunday; the second round kicks off in Mexico in early September.

Many businesses across the continent are hoping for a quick resolution, complaining that uncertainty over Nafta's future has disrupted commerce this year.

"Just the mention of Nafta and renegotiating in the same sentence has had an impact," said Daniel Winkowitsch, who oversees international sales for Tri-States Grain Conditioning, a Spirit Lake, Iowa, maker of temperature-monitoring devices for crop silos. Tri-States' sales to Mexico, which grew as U.S. food companies expanded there, fell by nearly 75% over the first six months of 2017 versus last year because of questions over U.S. trade policy, Mr. Winkowitsch said.

In seeking to overhaul Nafta, the Trump administration wants to remake a pact that has done much to transform a region covering one-fourth of the world economy and, according to backers, made the hemisphere more competitive against rivals in Asia and Europe. Since the agreement took effect in 1994, trade and investment between the countries has soared. The auto industry and other manufacturers have created intricate supply chains stretching across all three countries.

"Mexico and the U.S. are like a scrambled egg: There is no way anymore you can separate the white and the yolk," said Juan Pablo del Valle, chairman of petrochemical giant Mexichem, one of Mexico's largest public companies. It exports fluorspar and other raw materials from Mexico to its U.S. manufacturing plant in Louisiana, where it produces refrigerants used in the auto industry. The company, in turn, imports ethylene gas from the U.S. to feed its Mexico plants.

Yet making North American multinationals more efficient has cost U.S. workers their jobs, according to many labor unions, by making it easier for manufacturers to shift production to lower-cost Mexico. Mr. Trump picked up that complaint in his 2016 campaign and made Nafta the focus of his attacks on a quarter-century of bipartisan establishment support for globalization -- an era that began with Nafta as the first major trade pact between developed and developing countries.

But in his first months in office, the president has struggled to translate these messages into policy. In April, he ordered a study of how to curb steel and aluminum imports, giving aides a June deadline to craft a plan. That is now on hold.

In late April, the president was on the verge of dropping out of Nafta and celebrating the move at a Pennsylvania rally as one of the chief accomplishments of his first 100 days in office. He pulled back at the last minute, after cabinet members argued the abrupt move could cause severe economic disruptions, and pleas from his Mexican and Canadian counterparts. Instead, the three countries agreed to the renegotiation that begins this week.

President Trump's election and his Nafta-withdrawal threats have also chastened free traders in the business community and highlighted a political problem of their cause: their failure to make free trade, and Nafta specifically, work better for average Americans -- or at least persuade them that it does.

The Nafta talks are a chance to fix it. In the past six months, a frenzy of public relations and lobbying among Nafta defenders has sought to recast the debate -- inside the Trump administration, on Capitol Hill and among the American electorate.

Mexico's main trade group has had more than 120 meetings with U.S. policy makers over the past nine months, including 20 governors and more than 50 members of Congress. Canadian officials established a war-room-like operation and assigned specific cabinet ministers to business leaders, mayors and lawmakers in different U.S. states, with a focus on local regions where U.S. jobs are dependent on trade with Canada and Canadian investment.

Influential U.S. lawmakers have weighed in, especially from border states and agricultural districts that were big Nafta winners, demanding the Trump administration tread gently in the talks. At a June congressional hearing, Rep. Kenny Marchant (R., Texas) cited booming Canadian traffic at the Dallas-Fort Worth airport and told Mr. Trump's chief trade negotiator, Robert Lighthizer, that those gaining from it "are uneasy about the upcoming negotiations."

All of that pressure has persuaded Trump aides, if not the president himself, to acknowledge Nafta's benefits and the disruptions that could result for continent-wide supply chains built around Nafta's rules. In response to Mr. Marchant, Mr. Lighthizer said, "Our objective is to, first of all, do no harm," a phrase he repeated three times in the hearing.

When the administration released its official negotiating objectives, Canada, Mexico and big business said there was much they could accept. Indeed, they already had accepted many of the objectives last year, as part of the 12-nation Trans-Pacific Partnership spearheaded by President Barack Obama and killed by President Trump. Those provisions covered digital commerce, which didn't exist when Nafta was created, and stricter labor and environmental standards.

But the Trump objectives also include nods to the president's "America First" goals, drawing concern from the other countries. Those include proposals to scrap a special panel for settling tariff disputes among Nafta members and to tighten rules on how much of a manufactured product needs to come from inside Nafta to qualify for duty-free trade.

A key question is how hard Mr. Trump will push his team's first objective: to "improve the trade balance and reduce the trade deficit with the Nafta countries." Mr. Trump complains that the U.S. has gone from running a small goods surplus with Mexico before Nafta of about $2 billion, to a $63.2 billion deficit last year.

Free-trade advocates say it would be impossible to reverse that trend -- driven by economic factors as much as by trade policies -- in the talks, and it could be destructive to the region's economy to try.

"The potential for a breakdown in talks derives chiefly from the frequently expressed desire of President Trump and some of his associates to use the Nafta renegotiation to reduce the bilateral U.S. trade deficit with Mexico," the Peterson Institute for International Economics, an influential pro-globalization think tank, wrote in a recent report.

Write to Jacob M. Schlesinger at jacob.schlesinger@wsj.com, Robbie Whelan at robbie.whelan@wsj.com, Paul Vieira at paul.vieira@wsj.com and Jacob Bunge at jacob.bunge@wsj.com

(END) Dow Jones Newswires

August 13, 2017 07:14 ET (11:14 GMT)