Supply Chain Research

The U.S Trade Representative has published updated NAFTA negotiating guidelines at the start of the formal part of the fifth round of talks. Panjiva analysis shows there have been 41 changes to the text of the document compared to the original publication in July. Most of these relate to additions to the trade in goods sections, with notable highlights including:

– Specific rules to deal with import and export monopolies;

– Regulatory convergence in healthcare, technology, cosmetics, food/beverages (including agricultural biotech), autos and chemicals;

– Specific references to removing Canadian dairy/poultry tariffs and improving U.S. access to dairy markets and reducing barriers for U.S. alcoholic beverages;

– Rules of origin that include “specifically in the U.S.” – there isn’t a specific reference to autos, implying a broad-base approach;

Improved market access for U.S. pharmaceutical and medical devices;

Panjiva data shows that U.S. pharmaceutical exports have been in a longer term decline, dropping 3.3% annually for the past three years and hit the lowest since at least 2009 in January. Exports to Mexico and Canada were just 13.7% of the total and had fallen by 4.6% annually. The performance in medical devices has been better, with exports to Canada and Mexico accounting for 16.7% and having grown by 3.5% annually.

Chart compares U.S. imports of pharmaceuticals (HS 3003/3004) to medical devices (HS 9018) on a trailing quarterly total basis.  Source: Panjiva

Aside from the product regulations there were also regulatory references to:

– Adding “mechanisms to review and correct final administrative actions”, which suggests a move away from arbitration-type dispute settlement;

– An allowance for U.S. “non-conforming measures” in marine (Jones Act) and long-haul trucking;

– A dispute settlement process that ensures “the protection of U.S. sovereignty and maintenance of strong U.S. domestic industries”;

– A trilateral small/medium sized enterprise dialogue to promote business;

– A mechanism that ensures parties assess the benefits of NAFTA on a periodic basis;

– Improved government procurement rules;

– Specifics were also provided for the treatment of investments, competition policy and combating corruption.

As outlined in Panjiva research of November 15, the challenge for the negotiations has been the emergence of new “problems” over time. There are few issues here that were not already widely publicised – for example on long-haul trucking – though the broad-base potential for U.S.-specific rules of origin could be a huge problem. Yet, there are some that actually represent a softer stance – for example referring to a periodic assessment of the deal rather than a sunset clause.

The fundamental problem remains, however, that the U.S. continues to come from the starting point that the main purpose of renegotiating NAFTA is to cut the U.S. trade deficit. Canada and Mexico instead are looking to modernize the deal and make it compatible with other trade deals (such as CPTPP) that they are involved in. The U.S. trade deficit (goods exports less imports) with Canada and Mexico has climbed 10.9% on a year earlier year-to-date at September 30, and likely grew again in October.

Chart segments U.S. trade deficit with Canada and Mexico (goods exports less imports) by month. Dotted line shows deficit if the nine month aggregate growth rate was continued.  Source: Panjiva

Side-by-side comparison of July and November reports:

NAFTA Reports July Nov 2017 Compared