Automotive brief: North America

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NAFTA Renegotiations loom over prospects for North American automotive industry


Preparations are continuing for the formal start of talks between the US, Canada and Mexico over a renegotiation of the terms of the North American Free Trade Agreement (NAFTA), after US President Donald Trump’s 18 May announcement that he wished to seek a new deal triggered a 90-day countdown for talks to begin. The renegotiations are likely to focus on a range of key issues, with notable sticking points likely to include current stipulations regarding rules of origin, intellectual property rights and NAFTA’s investor-state dispute mechanism.

The NAFTA renegotiations are particularly salient to the automotive industry: on the presidential campaign trail in 2016, Trump repeatedly made reference to the ‘unfair’ terms of NAFTA and the jobs in the sector that had shifted south from the US to Mexico as a result of the deal. Industry players in all three NAFTA countries, but particularly the US and Mexico, are therefore watching developments with regards to the treaty very closely and nervously, for the impact that any changes to the deal may have on cross-border supply chains.

As an illustrative point, approximately 40% of auto parts in automobiles sold in the US but imported from Mexico were actually produced in the US. It is little wonder that US automotive companies, most of whom have significant production and other presence in US and Mexico, are lobbying the US government furiously to try to secure the best possible deal in the renegotiation. In conversations during recent visits from Control Risks’ consultants to major industry players in the US Midwest, the heartland of the US automotive industry, it was clear that NAFTA is their number one priority and concern when it comes to future strategic planning.

Mexican politics coming to the fore

The majority of the key issues to be renegotiated naturally came from the US, since it was President Trump who sought to change the terms of the deal. But in the months ahead, it may end up being Mexican politics that have the biggest overall influence on the timelines and eventual outcomes of any ‘new’ NAFTA. The reason: Mexico goes to the polls in June 2018, and the danger is that the talks become hostage to electioneering the further they go on. This is particularly likely given that the current frontrunner for the presidential election, leftist candidate Andrés Manuel López Obrador, is himself a declared opponent of NAFTA, and more generally raises concerns in the private sector for his frequent anti-business and anti-American rhetoric.

López Obrador’s presence at the head of the polls matters on a number of counts. For one, it may encourage the negotiating teams to try to reach a deal more quickly, ideally before the end of 2017. On paper, this would be a positive step to reduce the prevailing uncertainty over NAFTA’s future. But it also increases the potential for an imperfect deal to be struck, particularly given the apparent differences in opening positions between the three countries, which could find itself under attack again in the near future.

On the other side, if talks drag on into 2018, the current Mexican administration of President Enrique Peña Nieto will lose an element of its legitimacy to lead them ‘on behalf of’ Mexico, given that the presidential race will likely come down to a battle between López Obrador and the candidate of the centre-right opposition National Action Party (PAN), who is yet to be nominated. Although the PAN is strongly in favour of maintaining NAFTA, it will want to ensure that any final deal reflects its own interests, rather than merely rubber-stamping a deal agreed by the Peña Nieto administration.

Finally there is López Obrador himself. Control Risks does not believe that he would actively seek to withdraw Mexico from NAFTA. Despite his populist rhetoric, we believe he is something of a political pragmatist at heart, and such a move would undermine his government’s economic prospects from the start − if he were to win in 2018. However, there are collateral risks: for example, angry rhetoric towards the US and President Trump over security and immigration issues could draw an equally angry response and indirectly harden positions over NAFTA. Either way, his election would add a significant element of further uncertainty to the equation.

Grounds for optimism

Control Risks nonetheless remains optimistic that a new agreement will eventually be reached to avoid a breakdown of NAFTA. In the US, although the final negotiating team has yet to be announced, it has been telling that cooler heads have begun to prevail in the overall management of US-Mexico relations since President Trump’s inauguration in January. The US administration has also been left in no doubt by US business, including automotive companies that they do not wish for NAFTA to fall apart. Mexico and Canada are also determined to be pragmatic: neither of them wishes to renegotiate NAFTA, but they also know that they stand to lose far more by letting the US act unilaterally. The stage is set, then, for talks to begin in August.

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