WASHINGTON -- The next round of NAFTA negotiations is underway in Mexico City, and a lot is on the line.
To get a sense of the influences in Mexico that could shape a deal, I sat down last week here for a conversation with Juan Francisco Torres Landa, a partner in the Mexico City office of Hogan Lovells.
He has his finger on the political pulse in Mexico, and the law firm has many auto industry clients.
Torres Landa said negotiators will need to whittle down their remaining differences if there is any hope of finalizing a deal this year before a new government takes power in Mexico and adds uncertainty to the process.
Election Day is July 1, and the candidates have been chosen. Talks will be put on hold during the election season and cannot resume until a federal election tribunal certifies the results by late August or early September. That gives the sides two months to wrap up talks before November, when the current government of President Enrique Peña Nieto begins managing the transition to the next administration, which takes over in December.
Andres Manuel Lopez Obrador, the head of the leftist Morena party and its coalition partners, appears to be comfortably ahead in polls. He is invoking nationalist sentiments against America and would be the greatest threat to NAFTA and business interests, though he has sent out more moderate signals recently.
Any agreement will still have to be approved by the respective legislatures in each country. In the U.S., lawmakers are rallying to NAFTA's aid. In Mexico, all 428 congressional seats are also on the ballot and a new Mexican Senate and House might reject, or seek changes to, the agreement. There could be a push in Mexico to have a special session in November to ratify any NAFTA changes rather than punting a vote to a new, fragmented Congress, and the uncertainty that entails, Torres Landa told me.
No one party will be able to control Congress because the populace is divided, he said, noting that the three candidate-led coalitions were created by alliances of convenience from parties across the political spectrum.
That means recent structural reforms in the energy, telecom, and financial sectors will remain intact, because any efforts to change the laws requires a two-thirds majority of Congress.
"We see that as a positive development because anything that needs to occur from a congressional standpoint will necessarily involve heavy negotiations. And that will eliminate radical decisions," Torres Landa said. "So that's a good sign for businesses."
My colleagues and I have written recently about Canada's negotiating strategy and possible areas of compromise with an aggressive U.S. administration. Canada has proposed counting software, r&d and technology as eligible content to comply with rules of origin and duty-free status.
Mexico also might be willing to bend on rules of origin, Torres Landa said.
It will never accept the U.S. proposal for 85 per cent regional value requirement (up from 62.5 per cent today) or a U.S. national content requirement. But it might agree to a gradual increase in regional content over time, he said.
The U.S. also proposed that NAFTA automatically expire every five years unless all three nations affirmatively vote to continue it, but experts say that is destructive because it would create great uncertainty about the stability of trade and reduce investments. Instead, Mexico has proposed that the trade agreement be reviewed at five-year increments.
Torres Landa said a more sensible approach would be to bump up the content requirement a couple of points "and then use the periodic review process to determine, where there is merit, to add further increases in content." Such an approach would ensure the auto industry can absorb any changes without hurting competitiveness.