Talks to rewrite the North American Free Trade Agreement have stalled over tough American demands, dashing hopes that a deal can be reached this year.
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A fourth round of negotiations between the U.S., Mexico and Canada ended in mutual exasperation Tuesday. Talks will continue next month in Mexico City and will spill over into next year.
The negotiators had originally hoped to reach an agreement this year — before Mexico's presidential election and U.S. midterms turn up the political pressure in 2018.
President Donald Trump, who called NAFTA a job-killing "disaster" on the campaign trail, has threatened to withdraw from the 23-year-old pact if he can't get what he wants.
Canada and Mexico are balking at America's demand that a revamped deal do something to reduce America's trade deficits.
"We have seen no indication that our partners are willing to make any changes that will result in a rebalancing and a reduction in these huge trade deficits," U.S. Trade Rep. Robert Lighthizer said.
Canadian Foreign Minister Chrystia Freeland countered that America's "unconventional" proposals would "turn back the clock" and warned against a "winner-take-all mindset."
NAFTA ripped down most trade barriers between the U.S., Canada and Mexico. Trade surged within the NAFTA bloc, benefiting American farmers who export corn and other products.
But many U.S. manufacturers moved production south of the border to take advantage of Mexico's low labor costs, then shipped goods back to the United States. The influx of imports swelled America's trade deficit with Mexico, which came to $62 billion last year. (The United States logged an $8 billion trade surplus with Canada in 2016).
To cut the trade deficit with Mexico, the United States is demanding that more auto production be made in America before qualifying for NAFTA benefits.
But companies have built complicated supply chains that straddle NAFTA borders, taking advantage of each country's strengths — such as cheap labor in Mexico and skilled workers and proximity to customers in the United States and Canada. Changing the rules, they say, would disrupt their operations.
"These proposed rules would increase the cost of manufacturing and raise prices for consumers," said Ann Wilson, senior vice president for government affairs at the Motor & Equipment Manufacturers Association, which represents auto suppliers.
"It would just make North America less competitive, and it would impose an indirect barrier to trade," said trade lawyer Miguel Noyola, a principal at Baker & McKenzie LLP.
Lighthizer is also targeting a NAFTA provision that now allows companies to appeal to private tribunals when they object to decisions by the government of the country where they're investing — perhaps a costly environmental regulation.
Those tribunals mean companies don't have to worry as much about the political risks — and account for the potential cost — when they invest in less-developed countries. Effectively, Lighthizer argues, they put "a thumb on the scale" in Mexico's favor. The U.S. wants to limit companies' ability to appeal government decisions under NAFTA.
The U.S. is also proposing that the new NAFTA expire unless the countries agreed every few years to extend it. Critics say the so-called sunset clause would create too much uncertainty for businesses.
"Who would want to make an investment if they don't know what is going to happen in five years?" says former U.S. Ambassador to Mexico James Jones, now chairman of Monarch Global Strategies.