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Trump looks like he’s building a case for pulling out of NAFTA

Trump’s bizarre negotiation tactics make sense if you see them as a part of a withdrawal strategy.

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The Trump administration is staking out shockingly hardline positions in the newest round of NAFTA talks — raising new fears that the president doesn’t want to renegotiate the agreement so much as set the stage for pulling out of it.

In the latest round of negotiations over the free trade pact between the US, Canada, and Mexico, which concluded on Tuesday, US negotiators made a number of protectionist demands that Mexico and Canada consider nonstarters.

These include adding a five-year sunset clause that would require the countries to vote every five years on whether to stay in NAFTA; favoring US carmakers over Canadian and Mexican ones under standards requiring that a certain percentage of a product be made in North America; and gutting special dispute-settlement tools that Canada and Mexico consider vital to their ability to push back against punitive US border taxes.

Those demands, along with a few other wonkier ones, are so directly at odds with Canada’s and Mexico’s expectations for NAFTA — or any free trade agreement — that they almost seem designed to be rebuffed.

John Weekes, Canada's former chief NAFTA negotiator, said during a panel at the Council on Foreign Relations on Monday that the Trump administration’s proposals were “so extreme that one really has to ask the question whether President Trump wants to have a NAFTA or is he looking for an excuse to get out of it?”

The discord between the countries was palpable during a combative joint press conference on Tuesday, in which the three countries announced that negotiations would be extended through 2018 — later than they were originally scheduled to end — due to “significant conceptual gaps.”

While US Trade Representative Robert Lighthizer told reporters he was “surprised and disappointed” by the resistance to the US initiatives, his counterparts were resolute in their resistance.

“We have seen proposals that would turn back the clock on 23 years of predictability openness and collaboration under NAFTA,” said Chrystia Freeland, Canada's foreign minister. Mexican Secretary of the Economy Ildefonso Guajardo signaled openness to continuing dialogue but warned that “we all have limits.”

US proposals are crossing red lines for Canada and Mexico

The US’s proposed sunset clause, which trade experts tell me they’ve never seen in a free trade agreement before, is a particularly contentious idea. The clause would force the US, Canada, and Mexico to affirm their commitment to the deal every five years. That means every five years, there’s a possibility that the agreement could vanish because of just one party’s dissatisfaction with it.

That would make a lot of business in North America much tougher to carry out.

NAFTA was originally signed into law in 1993 to eliminate virtually all barriers to trade and investment among the US, Canada, and Mexico. The removal of trade barriers like tariffs — border taxes that make foreign imports more expensive — created a massive free trade zone that gave businesses in each country a much bigger set of options for where to make their goods, as well as a much bigger market for selling them.

But the specter of frictionless trade disappearing within five years will create a lot of uncertainty in the North American business environment. It’s hard for a company in any of the three countries to know how to calculate the payoffs of sourcing car parts from the US or building a factory in Mexico if, in a just few years, access to those parts or that labor might become a lot more costly if NAFTA collapses and border taxes start soaring.

“If you’re putting a clock on this, then that reduces the value of that agreement in the first place,” Chad Bown, a senior fellow at the Peterson Institute for International Economics, told me.

Canada and Mexico have pushed back hard against the sunset clause, and sometimes in rather colorful terms.

“If every marriage had a five-year sunset clause on it, I think our divorce rate would be a heck of a lot higher,” Canada’s Ambassador to Washington David MacNaughton said in September in anticipation of the proposal coming up in talks.

US negotiators’ push for making NAFTA rules highly favorable to the US auto industry is another major point of contention.

Currently, under NAFTA’s “rules of origin” standards, a car has to have 62.5 percent of its parts made somewhere in North America in order to not face tariffs while being shipped and sold across borders. The rest of the product can be made using parts from elsewhere — China, for example. The goal is to increase incentives for domestic production across North America as a whole.

But now US negotiators are pushing for the North America standard to be increased to 85 percent, and, crucially, calling for a new requirement that at least 50 percent of that be made specifically in the US.

In other words, the US is demanding that out of the parts of a car that have to come from North America, most of them have to come from the US. That would be a big win for US manufacturers and a big loss for Canadian and Mexican manufacturers.

That kind of power grab flies in the face of the way free trade agreements are supposed to work: They may never balance power perfectly, but at least on paper they’re meant to be beneficial for all parties involved. Saying the US should dominate auto production in North America so plainly appears to be a rejection of that principle.

Canada and Mexico also oppose the US’s bid to gut dispute-settlement measures that the two countries consider crucial to protecting their own economic interests.

For example, under Chapter 19 of the agreement, which the US wants to eliminate, Canada and Mexico can take their complaints against the US over certain kinds of tariffs to a special international court. These courts are supposed to be neutral arbiters — a way to correct for the power imbalance that existed prior to NAFTA, when Canada and Mexico had to take their grievances to US courts. These special Chapter 19 courts ensure the US doesn’t have home field advantage when it comes to deciding whether their tariffs are fair.

The existence of Chapter 19 has a deterrent effect on the US and its industries, causing them to pause before pushing for special tariffs on Canadian or Mexican goods. The system seems especially important today in light of big cases where the US is trying to unilaterally impose tariffs on Canadian softwood lumber and Canadian aircraft for allegedly violating rules governing fair trade.

If talks collapse, NAFTA could be in danger

The US proposals in this latest round of talks have been so far outside the boundaries of what’s normal that even the US negotiators appeared to be uncomfortable while pushing for them. “They don’t like what they are doing,” a source familiar with the negotiations told Canada’s CBC News.

Bown told me that based on conversations with former Canadian and Mexican officials, the US proposals are nonstarters. “I don’t see them leaving the table, but I don’t see them agreeing to these draconian proposals,” he said.

If the US is serious about sticking to its proposals and Canada and Mexico refuse to budge as well, the talks could collapse. If that were to happen, NAFTA itself could be in danger.

Trump has repeatedly threatened to pull out of NAFTA if Mexico and Canada don’t comply with his wishes, and more recently he’s said that he’s willing to scrap the agreement in order to ensure the US gets the best possible deal. “I happen to think that NAFTA will have to be terminated if we’re going to make it good,” he said during an interview with Forbes last week.

That wouldn’t just create diplomatic chaos with Canada and Mexico. It would set off a wave of economic turmoil across North America that would hit US exporters to Mexico particularly hard. That’s why big business groups like the US Chamber of Commerce are ramping up their lobbying effort against the US negotiators’ latest demands.

It would also be a reminder that while Trump has boasted of his skills as a masterful dealmaker, so far his presidency has been about blowing up agreements instead of improving them. If NAFTA goes the way of the Paris climate accord or the Trans-Pacific Partnership, it will be one more example of his emerging presidential legacy: the art of the withdrawal.