Mexico Sees Swift NAFTA Rewrite as Trump Eases Rhetoric

Sam Hodgson/Bloomberg News

Mexico’s top trade negotiator said he was heartened by a retreat from more protectionist rhetoric in the United States and that talks to redo the North American Free Trade Agreement may conclude as soon as January.

Economy Minister Ildefonso Guajardo said the January date would depend on the administration of President Donald Trump notifying Congress in time for negotiations to begin by the end of July.

"The U.S. has to trigger the mechanism,” Guajardo said in an interview with Bloomberg TV’s Erik Schatzker in Buenos Aires. “What I keep hearing is that after Congress comes back from recess, they will be able to be notified by the end of April." In that case, talks can start by the end of July, followed by "six months of negotiations, and then we send it to the legislative branch for them to approve it."

Investors have shed their doomsday outlook on Mexico in recent weeks after White House officials repeatedly said that both Mexico and the U.S. stand to benefit from a renegotiation of NAFTA. The peso has rebounded from a record low in January and is now the best performer of all currencies tracked by Bloomberg, and companies that had put investments on hold as then-candidate Trump railed against NAFTA are racing back into the country.

"It will be in the best interest of both countries involved to make this process very efficient," Guajardo said, noting that Mexico has presidential elections in mid-2018 and the U.S. has a midterm vote in November of next year.

Still, Guajardo warned that even minor changes may be difficult to negotiate. On one of those changes, raising the average percentage of auto inputs that must be made in the North American region to 70% from 62.5% seems reasonable, Guajardo said on the sidelines of the World Economic Forum’s Latin America meeting in Buenos Aires. However, pushing it to 95% would be extreme and hurt the region’s competitiveness.

"Mexico will be willing to buy more from the U.S.," Guajardo said. "We can make an additional effort as long as you have the supply process already in place to be able to supply in Mexico at a competitive cost."

The Trump administration has softened its rhetoric notably from January, when then President-elect Trump tweeted that he’ll slap heavy taxes on businesses that move jobs to Mexico. Since then, U.S. Treasury Secretary Steven Mnuchin has said redoing NAFTA could spell a win-win for both sides. Commerce Secretary Wilbur Ross said he anticipates a sensible deal, and Peter Navarro, who leads the White House National Trade Council, said he wants Canada, Mexico and the U.S. to become a global manufacturing powerhouse.

Some of Trump’s early stumbles, such as the collapse of the health care bill and court orders against two attempts at a travel ban have also underscored how hard it is to make any drastic changes in Washington.

For example, House Speaker Paul Ryan has been pushing to replace corporate income tax with a tax on businesses’ domestic sales and imports, exempting exports. The border adjustment tax proposal raised alarm bells among importers in the U.S., as well as government officials in Mexico as they feared it would reduce shipments north of the border. But support for the measure has waned in Washington.

That border tax may run the risk of violating principles of the World Trade Organization, and Mexico reserves the right to file a complaint against it, Guajardo said in the interview. In addition, if the U.S. reduces its corporate tax rate, the nation would have to rethink its own tax policy to keep being attractive for foreign investment.

A March 22 draft proposal to rework NAFTA signed by acting U.S. Trade Representative Stephen Vaughn states that the U.S. will seek to give preference to domestic companies for government procurement while finding opportunities for U.S. companies to bid in Mexico and Canada procurement markets. While noting that the White House has backed away from the letter, Guajardo said that if the U.S. wants access to Mexico’s public purchases, it will have to give Mexico access to its own public purchases.

Trump must issue a formal 90-day notice of his intent to Congress to revisit NAFTA, but the administration so far has been vague about what the U.S. will seek from Mexico and Canada in the talks. Ross said March 10 that the White House would give its notice to Congress within weeks, but it has yet to happen. Mexico has been lobbying for a swift renegotiation that could be concluded before the mid-2018 presidential elections.