President Donald Trump's declaration of broad tariffs on imported steel and aluminum complicates North American trade talks and threatens to doom them altogether.
Negotiators have been meeting in Mexico this week in the seventh round of talks aimed at revamping and modernizing the 24-year old North American Free Trade Agreement. On Monday, trade representatives from the three countries are expected to comment on their progress.
But now NAFTA is caught in the middle of what could rapidly become an ugly global tit for tat against U.S. trade actions. The European Union has already threatened tariffs on American jeans, bourbon and motorcycles, and other countries have said they could retaliate.
"The key question people are asking is whether this is a signal that the administration is sending on all trade relationships," said Carlos Pascual, senior vice president, IHS Markit. "Clearly, both the U.S. and Mexico have a great deal at stake" in the access they have to each other's markets.
Pascual, a former U.S. ambassador to Mexico, said the tariffs could now complicate the talks and lengthen them. They had been scheduled for an eighth round, and negotiators were attempting to complete them by the July presidential election in Mexico.
"This is more than posturing. It's a fundamental issue that could strike at the heart of the rationale of the NAFTA agreement," he said. "I think the process is going to take a lot longer and they will schedule another round."
Goldman Sachs economists said the tariffs could trigger more disruptive trade reactions, including possibly stalling NAFTA negotiations and possible restrictions on Chinese trade and investment.
"There is a good chance that this could eventually lead the President to announce he intends to withdraw from NAFTA, but such an announcement does not appear likely in the near term, in our view," the economists wrote in a note.
China is believed to be the target of the tariffs, but Canada is the biggest exporter of both steel and aluminum to the U.S., and Mexico is a major steel exporter. China does not show up at the top of the list of exporters.
Canadian officials said they could retaliate and took issue with Trump using national security as a reason for the tariffs. Prime Minister Justin Trudeau on Friday called the tariffs unacceptable and said they would be disruptive to markets on both sides of the border.
"The Canadian comments were very strong and very harsh. These very clear tensions will be reflected in the negotiations ... just when it seemed the conversations on NAFTA were more productive, this definitely doesn't help. I expect the tone of the negotiations to change," said Juan Carlos Hartasánchez, Albright Stonebridge Group senior director.
Hartasánchez said if Mexico is included in the tariffs, it will respond. "If the tariffs affect Mexico, it will definitely change their position. They will react and impose some tariffs as well, and that certainly cannot help when you're negotiating a free trade agreement," he said.
NAFTA still has a 50/50 chance of being reworked, said Hartasánchez, noting he had been even more optimistic before Thursday's announcement from Trump. He said Mexico had shown willingness to be flexible on one of the biggest sticking points — the U.S. demand that half of car parts be U.S.-made. But that issue remains outstanding.
Trump ran for president on his assertion that U.S. trade deals were unfair and stacked against American workers. He was particularly negative on NAFTA, as he also railed against Mexico on border security and immigration.
His vow Thursday that he would put 25 percent tariffs on steel and 10 percent tariffs on aluminum imports from every country is his most strident trade action yet. It drew immediate complaints from a wide range of U.S. businesses, angered by the prospect of higher raw material costs and the potential for other trade skirmishes.
Citigroup North American economist Dana Peterson said Trump's announcement comes at a key time for the NAFTA talks. If the U.S. wants to extend fast-track talks beyond July, the U.S. trade representative will have to go to Congress in April.
"The progress has been quite slow. Even without this tariff business, you could see new rounds that extend into the summertime and past that," said Peterson. "The key thing is how patient is the Trump administration going to be. It seems the president is looking to advance his agenda on trade and he may not be that patient ... this next month is going to be critical."
Peterson said unless Mexico and Canada are excluded before formal announcement of the tariffs next week, NAFTA will be complicated. "There's potential Canada could be less cooperative," she said. Peterson said she believes there is a 60 percent chance that NAFTA will be revised.
Hartasánchez said the president may have been pointing to Canada when he implied China could use other countries as a back door for dumping their products. "It did seem the way he has framed it that it seems to indicate there will be no countries left out," he said, adding Trump was implying other countries could sell the steel or aluminum for China. "He said other countries could bring it in indirectly. I think that was a direct reference to Canada."
Alcoa in a statement pleaded with the administration to exempt Canada from the tariffs. "We believe vital trading partners, including Canada, should be exempt from any tariff on aluminum. The aluminum industry has an integrated supply chain and actions should not penalize those that abide by the rules. We will continue to work on solutions that create a level playing field and address Chinese overcapacity," it said.