This week, talks between the US, Canada and Mexico began on the North American Free Trade Agreement, or Nafta.  All sides want success but that will depend on several factors.

The Financial Times reports that one of the key focuses of the negotiations for the US, as mentioned in the opening remarks of President Trump's trade representative, Robert Lighthizer, is a review of the rules of origin, which stipulate what percentage of products from outside the Nafta area can be used in the manufacture of Nafta goods. For example, a car manufactured in the US, Canada or Mexico and sold freely in those countries, must contain at least 62.5 per cent parts that originate inside the Nafta bloc. The FT writes that tightening the rules of origin could have a detrimental effect on the US auto industry: “The highly integrated Nafta auto supply chains will be disrupted and Mexico will be encouraged to focus its increasingly efficient car industry elsewhere. The number of jobs created in the US is likely to be negligible, if not negative.” It adds that the US wishlist for changing Nafta is likely to distort trade rather than encourage it and concludes that “Mr Trump’s attempts fundamentally to rewrite Nafta deserve to fail.”

Need for US compromise

A report from KPMG has a more positive view of the Nafta renegotiations. Russ Crawford, partner at KPMG in Canada, said: “The most likely outcome of the renegotiation is a quick, relatively painless agreement by the first quarter of next year. All sides have an interest in the status quo, and a quick agreement could give US President Donald Trump a concrete achievement to present ahead of the 2018 midterm elections.”

However, the authors of the report, which was written in partnership with Eurasia Group, also said that a successful outcome would depend on the US being prepared to abandon some of its more controversial goals.

Nafta's issues to resolve

Some of the most important issues the negotiators will have to resolve include:

• Chapter 19 dispute settlement mechanisms – the US wants to eliminate them, but both the Mexican and Canadian governments want to preserve them;
• Rules of origin – the US believes strengthening the rules will help make its manufacturing sector more competitive but could be very disruptive for existing value chains;
• trade deficit reduction – Mexican negotiators will resist overly ambitious and onerous targets;
• Labour standards – the Mexican government is willing in principle to make changes to its labour laws and to raise the minimum wage to satisfy US demands, but recently approved labour reform leaves little room for further movement.

Eurasia Group's Jonathan Lieber gave his view on some of the success factors for the Nafta talks: “If these issues have not been settled by the end of this year, that would be a negative sign for the talk. Similarly, silence from political leaders – especially President Trump – would be a good sign. If the negotiations can be kept out of the public eye, they are much more likely to succeed."