White House Unveils Its Plans for Remaking Nafta -2-

By William MauldinFeaturesDow Jones Newswires

The Trump administration released its road map for remaking the North American Free Trade Agreement that aims to preserve "Buy America" provisions and reduce the U.S. trade deficit, but steps back from some of President Donald Trump's most fiery campaign rhetoric on trade with Mexico and Canada.

The blueprint for a new Nafta shows the White House trying to navigate the shoals of striking a deal with its closest trading partners that can pass in U.S. Congress. It contains nods to Mr. Trump's base of voters fearful and angry over lost U.S. manufacturing jobs -- including the broad objective for reducing the U.S. trade deficit with Nafta countries and an effort to retain rules that favor U.S. firms in government procurement.

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The plan also backs an unspecified mechanism to prevent countries from manipulating their currencies for trade advantage, an issue of increasing concern among lawmakers and some economists, though one less central to U.S. trade ties with Mexico and Canada. It also includes provisions meant to challenge Mexico on labor and environmental issues.

In the 2016 campaign Mr. Trump repeatedly threatened to withdraw from Nafta, calling it the "worst trade deal maybe ever signed anywhere." The plan released Monday didn't deviate substantially from established U.S. trade policy.

It drew a muted response from wary business groups and Republican lawmakers, whose votes will be needed to pass any agreement signed by Canada and Mexico.

Democratic lawmakers, meanwhile, attacked the blueprint as vague and insufficient, indicating the challenge Mr. Trump faces in winning support across party lines. And some of the Nafta objectives laid out in the document could alienate officials in Mexico City and Ottawa, including a goal of eliminating a dispute settlement system that allows trading partners to challenge duties imposed by Washington on goods allegedly dumped at below market costs.

The criticism underscores the challenge Mr. Trump -- or any president -- faces in negotiating a new deal in a heated political environment.

Less than two years ago, Barack Obama hammered out the Trans-Pacific Partnership with 11 Pacific nations but couldn't get the deal to a vote in Congress as the 2016 election geared up.

Mr. Trump's previous threats of withdrawing from the deal could still give him some leverage.

Some issues show common ground between Mr. Trump, who has complained about unfair trade practices in Mexico, and Democratic lawmakers, who want much stronger labor and environmental provisions in Nafta to keep companies from cutting corners by moving abroad.

In Monday's road map, the Trump administration backed much stronger labor standards in the new Nafta than the previous ones, which were added late in negotiations as a side agreement to win congressional approval of the original pact in 1993.

Mr. Trump's proposed strengthening of those provisions wasn't enough to draw the immediate support of Democrats, including those who supported Mr. Obama's policy and the Pacific pact.

Sen. Ron Wyden (D., Ore.), the top Democrat on the Senate committee that oversees trade, called the blueprint "hopelessly vague both in explaining how the administration's specific objectives will benefit the United States on key topics ranging from intellectual property rights and investment, to currency manipulation and government procurement."

Mr. Wyden's Republican counterpart, Sen. Orrin Hatch of Utah, applauded the administration's commitment to working with Congress but said "future negotiating objectives must include stronger protections for intellectual property rights, upgraded rules and enforcement procedures for American exporters and investors, and improved regulatory practices that treat American goods and services fairly."

Rep. Kevin Brady (R., Texas), the chairman of the House committee that handles trade, applauded the administration and said the objectives are an "ambitious standard for improving Nafta and make clear that the United States is seeking strong, enforceable rules that go beyond any agreement ever negotiated."

If the administration moves as quickly as officials have signaled, lawmakers and outside groups may have only a few months to influence the debate.

U.S. trade representative Robert Lighthizer formally notified congressional leaders on May 18 of the president's plans to renegotiate Nafta, a step that, like Monday's publication of a road map, is required under the 2015 law known as "fast track" or trade promotion authority. The law allows expedited congressional consideration of trade deals, with an up-or-down vote and no amendments, if the administration follows certain procedures.

"We clearly need to see more details, and I look forward to having further conversations with Ambassador Lighthizer," said Sen. Sherrod Brown, an Ohio Democrat.

Under fast track, the U.S., Mexico and Canada may now begin talks in 30 days. U.S. officials say they would like to finish the talks by January, before the Mexican presidential campaign and U.S. midterm elections heat up.

"It's a pretty short period of time, but we also have a political problem" in the Mexican elections, said Carla Hills, a lawyer and consultant who led Nafta's negotiations as U.S. trade representative under President George H.W. Bush.

Faced with a drop in political support, the White House is focusing this week on "Made in America" products in an effort to shore up support among voters skeptical of free trade and globalization.

The administration appears divided between "economic nationalists" who want to erect barriers at the border to defend manufacturing workers and business-friendly officials who say erecting barriers could hurt overall income and economic growth. The modest tone of the principles released by Mr. Trump Monday could be seen as a victory for the business-friendly wing of his White House.

Mr. Trump repeatedly threatened during the 2016 campaign to withdraw from Nafta, which he called the "worst trade deal maybe ever signed anywhere," and as recently as April he considered pulling out of the pact before deciding, after a congressional backlash, to attempt a renegotiation.

"We can keep the current benefits of the Nafta, enhance them with modern, new provisions, and proceed in a way that avoids disrupting the flow of trade and the millions of jobs it supports," said Myron Brilliant, executive vice president at the U.S. Chamber of Commerce, the biggest business lobby. "The Chamber and its members are ready to roll up our sleeves and get to work."

Before of the release of the negotiating objectives, Canadian Prime Minister Justin Trudeau said his country stood ready to begin talks "as soon as its practical," with officials prepared to make changes that modernize the trade pact -- reflecting changes in technology and electronic commerce -- that improve the economic prospects for workers in all three countries.

One area where the plan does embrace the trade warrior agenda is a proposal to scrap a special Nafta provision that has made it easier for Canada and Mexico to avert U.S. trade sanctions, the so-called "Chapter 19 dispute settlement mechanism." Canada in particular has made keeping Chapter 19 a priority.

"There are some time bombs in here that will get people going in Canada, " said Mark Warner, a Toronto-based trade lawyer with clients in the U.S. and Canada, pointing to the Chapter 19 issue.

Canada Foreign Minister Chrystia Freeland said the country welcomed the opportunity to improve the existing Nafta framework. The government would do so "while defending Canada's national interest and standing for our values," she said.

In Mexico, concerns that the Nafta renegotiation could prove damaging have diminished in recent months, and that has been reflected in gains in the peso, which is trading at a 14-month high at fewer than 18 pesos to the U.S. dollar. The peso hit a record low around 22 to the dollar in January as Mr. Trump prepared to take office, with investors spooked by the Ford Motor Co.'s decision to cancel a planned $1.6 billion investment in a new plant in Mexico.

Should the U.S. abandon Nafta and revert to import tariffs under World Trade Organization rules, Mexico would be allowed to impose significantly higher tariffs for U.S. goods than the U.S. would for Mexican imports, Mexican observers say. In the case of vehicles manufactured in Mexico, excluding pickup trucks, the U.S. import tariff under the WTO's most-favored nation status would be just 2.5%.

The Trump administration on Monday highlighted a complicated set of rules that determine which products and components have enough North American content to be traded duty free across the continent's borders.

Mexican officials say that they, like the Trump administration, are also open to reviewing the pact's "rules of origin," as long as proposed changes don't threaten to hurt investment by making it easier for manufacturers to bypass Mexico altogether if they're unable to import certain components from outside the region to make products bound for the U.S.

"We need to make sure that there's equilibrium, and avoid objectives that will be out of reach and affect productivity," a senior Mexican official said.

But the Mexican auto industry, the country's largest manufacturing sector which accounts for about a third of Mexico's factory exports, doesn't want any changes in its rules of origin. Imported components from Asia represent less than 3% of a car's value, according to estimates from the Mexican government.

U.S.-based car manufacturers also don't want significant changes to the rules of origin.

The administration also wants to make Nafta the first U.S. trade pact to police "currency manipulation." That would be a big deal -- and one that may be easy to reach, because neither Canada nor Mexico face such accusations, which are usually leveled at Asian trading partners. The goal would be to establish this as precedent for future trade pacts.

--Jacob M. Schlesinger in Washington, Anthony Harrup in Mexico City and Paul Vieira in Ottawa contributed to this article.

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

(END) Dow Jones Newswires

July 17, 2017 20:00 ET (00:00 GMT)