While few believe the US will actually withdraw from the North American Free Trade Agreement (NAFTA), there are big hurdles to overcome in the renegotiations, especially with the Mexico presidential election looming on 1 July, where candidates are taking a harder line on US relations.
Three sticking points are of major concern to the US chemical sector – US proposals to eliminate the investor state dispute settlement (ISDS) mechanism, put in a five-year sunset provision, and to revise rules of origin.
“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… some of these provisions… are non-starters unless they’re modified fairly significantly,” said Cal Dooley, CEO of the American Chemistry Council (ACC). “If the administration drives a hard line… they really create a situation where it’s going to be very hard, for Mexico in particular… to be willing to accept those.”
Under the ISDS, foreign investors can sue host governments for actions infringing their investments using international arbitration. The US administration contends that if US companies didn’t have the recourse ISDS provides for an inappropriate action abroad, they would be “more likely to make that investment – not in Mexico – but in the United States”, said Dooley.
However, “it’s not an all-or-nothing proposition” as US operations can benefit and expand if they have an affiliate in Mexico to send products to, he noted.
And a five-year sunset provision requiring renewal would be problematic. Multi-billion dollar 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”, said Dooley.
On rules of origin, the US is proposing higher levels of local content for products to qualify for free trade, and a minimum for US content in certain products.
If the US were to withdraw from NAFTA, tariffs on US chemical exports to Mexico and Canada would likely snap back to Most Favoured Nation tariff schedules at a minimum, said the ACC CEO. This would be around 6% for Mexico, leading to a fall in US exports to the country by about 12%, said Dooley. 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.