Three sticking points could hamper NAFTA deal – ACC

28 February 2018 22:06 Source:ICIS News

NEW YORK (ICIS)--Three major sticking points in the renegotiation of the North American Free Trade Agreement (NAFTA) between the US, Mexico and Canada are of major concern to the US chemical sector, the head of the American Chemistry Council (ACC) said on Wednesday.

The three issues at stake are the US administration’s proposals to eliminate the investor state dispute settlement (ISDS) mechanism between private companies and governments, to put a five-year sunset provision on NAFTA, and to revise rules of origin levels on products eligible for free trade status.

“I don’t think the odds are [likely] that we will have an absolute withdrawal from the NAFTA agreement, but I can’t totally rule that out because I think some of these provisions, especially on the investor-state dispute [resolution] and the sun-setting, and perhaps even the rules of origin – some of those are non-starters unless they’re modified fairly significantly, with Canada and Mexico,” said Cal Dooley, president and CEO of the ACC, on a special conference call on NAFTA.

“If the administration drives a hard line on those three areas, they really create a situation where it’s going to be very hard, for Mexico in particular when they’re poised to see their elections occur in the near term, that they’re going to be willing to accept those,” he added.

Dooley believes NAFTA can be modernised but points out it’s critical not to jeopardise the integrated North American market that is benefiting the US, Mexico and Canada.

INVESTOR-STATE DISPUTE RESOLUTION

Under the ISDS mechanism, foreign investors can bring lawsuits against host governments if they believe certain policies or actions infringe on their investments. The disputes are resolved not by the local government, but by an international arbitration panel.

“We think this is a key tool to ensure that private companies have some recourse to an egregious action by a governmental entity in another country that could result in a retaliation against, or an impediment to trade in products that are manufactured in the US,” said Dooley.

The US administration contends that if US companies didn’t have the recourse that ISDS provides for an inappropriate action abroad, that they would be “more likely to make that investment – not in Mexico – but in the United States”, said Dooley.

However, for the chemical industry, it’s important to have certain production close to consumers, as many materials are not easily transported across long distances, he noted.

“What’s also important to understand is that… it’s not an all-or-nothing proposition. [A company’s] operations in the US actually benefit and expand when they have the opportunity to have an affiliate or an operation located in Mexico, because they’re supplying a lot of products to them,” said Dooley.

“With our sector, that argument that… they’d be more likely to invest in the US just doesn’t work. This investment wouldn’t be replicated in the US – this is an additional investment that actually also [benefits US operations],” he added.

This is the result of highly integrated manufacturing supply chains between the US, Mexico and Canada.

Across all industries, 42% of US exports to Mexico are to related parties, as are 40% of US exports to Canada. And 71% of imports to the US from Mexico are from related parties, along with half of the imports from Canada, according to the ACC.

FIVE-YEAR SUNSET PROVISION

And a five-year sunset provision in NAFTA as proposed by the US would be problematic for chemical companies and overall manufacturing investment in the US, said the ACC head. Under this clause, NAFTA would have to be renewed every five years by all three countries.

Of the $188bn in US chemical investments completed, under construction or in the permitting phase since the shale gas boom, “a lot of those are individual investments of $5bn or more”, said Dooley.

“Those $5bn investments are not made on a five-year horizon – they’re being made on a 40-year horizon and are also predicated on having some consistent rules of trade and market opportunities,” he added.

RULES OF ORIGIN

The third sticking point, but of somewhat less concern than the first two, are the rules of origin, said Dooley.

Rules of origin are the criteria that determine the national origin of a product. In free trade agreements (FTAs), they have major implications on tariffs or lack thereof on imported products.

The US is proposing more stringent levels of local content for products to qualify for free trade, and also a minimum requirement for US content in certain products such as autos.

While Dooley did not address rules of origin in detail, he said this is another sticking point that could hinder a deal.

STAKES ARE HIGH

Dooley highlights what’s at stake if the US withdraws from NAFTA. First and foremost, it would diminish the inherent competitive advantage of the US chemical industry in the global market.

Without NAFTA, US chemical exports to Mexico and Canada in the worst case scenario could fall by up to $22bn, or 45% of the current export total. This would create a total loss of chemical demand on the order of around $29bn, when accounting for decreased demand from key end-use sectors such as automotive, electronics and appliances, according to the ACC.

The ACC estimates US chemical exports to Mexico and Canada will reach around $44bn in 2018, growing to $59bn by 2025 in a status quo scenario.

If the US were to withdraw from NAFTA, tariffs on US chemical exports to Mexico and Canada would likely snap back to Most Favored Nation (MFN) tariff schedules at a minimum, said the ACC CEO.

“On average, we calculate for Mexico this would be in the range of 6% or so. When you look at that impact in terms of our exports, we anticipate that it would result in a decline of about 12% from our baseline,” said Dooley.

“That’s significant… You would have US chemical products we would be exporting to Mexico that would almost suddenly become 6% more expensive,” he added.

That would open the door to other suppliers around the world, from Europe, Brazil and China, among others, he noted.

In the worst case scenario, Mexico could go to its “Final Bound” tariff rate which averages 36.2% across all products, according to the ACC.

Focus article by Joseph Chang

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By Joseph Chang