‘If the US Is in a Hurry with NAFTA, it Will Have To Become More Flexible’

The free trade agreement between the U.S., Canada, and Mexico is at risk. Former diplomat Luis de la Calle does not understand the attitude of the U.S.

These are confusing times, Luis de la Calle thinks. As economic attaché at the Mexican Embassy in Washington in the early 90s, the former top diplomat was closely involved with the creation of NAFTA, the free trade agreement between the U.S., Mexico and Canada. It brought the three North American countries the largest free trade zone in the world. Since the ratification in 1994, their mutual trade has tripled.

All of a sudden, a quarter of a century later, the future of NAFTA is uncertain, now that President Donald Trump is fulfilling his election promise to trade the “worst” trade deal for “a better deal.”

“It is the world turned upside down that Mexico as a smaller and poorer country needs to explain the blessings of free trade to an American government – of Republicans no less,” de la Calle says, nowadays as a consultant, on the phone from Mexico City,

Last week, the eighth round of negotiations on the renewal of NAFTA was concluded, with many remaining sore points. And time is running out, speaker of the U.S. House of Representatives, Paul Ryan, warned last week. In order to present the current Congress with a renewed treaty according to procedure, an agreement needs to ultimately be reached this Thursday. Midterm elections in the U.S. will be held in November, which could considerably change relations in Washington come January.

But, according to de la Calle, Mexico (and Canada) should not let themselves be pressured. On some levels “useful improvements have been agreed upon in the past few months. But the U.S. also sets demands that have no logic whatsoever. These only delay the talks,” he says.

The Auto Industry Is the Main Disagreement

This situation mainly concerns the auto industry: Trump’s big battle. The president won in labor states where many factories have closed over the past decades, partly because jobs were shipped to Mexico. Trump wants to ‘bring back’ those jobs by making Mexico less attractive: by making it pay higher salaries, by enforcing stricter environmental and labor laws, by adjusting the rules of origin.*

According to de la Calle, Trump disregards the interconnectedness of the three countries. Cars are assembled partly in one country and partly in the other. “The American car industry can for now still compete with those of Japan or Europe, thanks to the cheap labor in Mexico” he says. In short, without NAFTA, even more American jobs would have been lost. “Trump now realizes that as well.”

At another level, there is also rearguard action. “The new generation of cars is electric, they are really computers on wheels. To compete with that, you have to want to be as agile as possible,” says de la Calle.

The new American demands on Mexico would hit the U.S. the hardest, he poses. “We [Mexico] at least still have agreements with the rest of the world,” he notes.

Trump, however, has stopped talking about the new trade agreements like the Trans-Atlantic Trade and Investment Partnership (with the EU) and the Trans-Pacific Partnership (with Pacific Ocean countries) since his inauguration. Just like he withdrew America’s signature from the Paris climate agreement (last year) and the nuclear deal with Iran (last week). Will NAFTA become the next international partnership from which the U.S., under Trump, withdraws?

The Mexican diplomat does not think so. But he is not completely sure either. “There is a 10 percent chance that the U.S. will get out. I put the chance of an agreement before the end of the year at 30 percent. The biggest chance is that NAFTA will continue to exist in its current form, thus unmodified: 60 percent,” de la Calle says.

Forthcoming elections

According to de la Calle, Ryan’s deadline is “artificial.” The next Congress, which will take office at the beginning of 2019, can also vote on a renewed agreement.

Plus, the Mexicans have a completely different ultimatum in mind. On June 1, the temporary exemption for American import duties on steel and aluminum ends for Mexico (and Canada). If Washington does not extend that exemption, “we will cut off the NAFTA talks as well,” de la Calle says.

And on July 1, Mexico goes to the polls. The country will elect a new president and parliament. So in Mexico City, too, a different political wind may start to blow, although all parties say they want to keep the treaty. The frontrunner in the polls, the left-nationalist Andrés Manuel López Obrador, does promise to present the U.S. with a stronger rebuff.

From that point of view, it would be logical for the Americans to seal an agreement with the current Mexican government. Says de la Calle: “If the U.S. is in such a hurry, it needs to become more flexible.”

*Editor’s note: The NAFTA rules of origin provide the basis for customs officials to make determinations about which goods are entitled to preferential tariff treatment.