A month ago, we noted that the future of the NAFTA renegotiations was very uncertain and that the time to get a deal done in 2018, with the current Mexican government and the current U.S. Congress, was quickly evaporating. Regrettably, the situation has only worsened since then. It is now quite clear that there is virtually no chance for a deal in 2018, although none of the parties have yet formally abandoned the negotiation process and talks—for whatever they are now worth—continue. But we must be honest about the situation: it’s not looking good.

NAFTA negotiators blew through what was supposed to have been the final May 17 deadline for completing a new trilateral trade agreement in 2018. U.S. Trade Representative Robert Lighthizer argued that "the NAFTA countries are nowhere near close to a deal." But the Mexican and Canadian negotiators continued to insist that a deal could still be concluded by the end of May. To get there, officials considered a "skinny" deal that would focus on auto rules of origin and other regulatory changes that would not require the approval of the U.S. Congress. Labor unions, some key members of Congress, and Mexico, however, all opposed the idea. For Mexico, this option meant they would have to give up a lot while getting little in return from the United States.

For his part, President Trump turned up the pressure by ordering Commerce Secretary Wilbur Ross to begin a section 232 investigation into the potential threat to U.S. national security from automobile imports. The investigation will take months. There is deep skepticism that auto imports could in any way pose a national security threat to the United States, and beyond the scope of the bilateral U.S.-Mexico relationship the United States’ use of these national security provisions not only strains credibility but opens the door for copy-cat moves by other countries in the future that will undoubtedly harm U.S. interests. The contagion effect is very real.

It is now quite clear that there is virtually no chance for a deal in 2018, although none of the parties have yet formally abandoned the negotiation process and talks—for whatever they are now worth—continue.

The Trump administration has, at least until now, been unwilling to compromise on some of its key demands that the Mexicans and Canadians believe are non-starters. Mexican gestures of compromise on autos have been largely rejected. And President Trump, perhaps (wrongly) thinking he could gain some leverage in the negotiations, initiated a process on May 23 that could lead to a 25 percent tariff on all cars imported into the United States and, to the surprise of all, on May 31, terminated the Mexican and Canadian exemptions from the 25 percent steel and 10 percent aluminum tariffs imposed in March.

Both countries retaliated, with Mexico imposing 15-25 percent tariffs on a wide range of U.S. exports targeted to impact the districts of key Republican lawmakers. Mexico also challenged the legality of the U.S. tariffs in the World Trade Organization. Meanwhile, following the G-7 summit in Canada, an aggrieved President Trump and his White House advisors launched a blistering and quite personal attack on Canadian Prime Minister Justin Trudeau, casting a pall over the NAFTA talks.

Adding insult to injury, after weeks of remaining silent, President Trump returned to his demand that Mexico pay for a border wall, which elicited a tersely-worded response from Mexican President Enrique Peña Nieto stating that Mexico would never pay for a wall. In the midst of these tensions, it was presidential frontrunner Andrés Manuel López Obrador (AMLO) who tried to play the peacemaker by calling on the Mexican government to act firmly in response to American taunts, but to not respond in kind to every affront for fear of starting a trade war that Mexico can ill-afford.

Looking ahead, it’s quite hard to see how the parties get out of their current rut unless the Trump administration significantly changes its approach to the negotiations and begins to show some flexibility.

Looking ahead, it’s quite hard to see how the parties get out of their current rut unless the Trump administration significantly changes its approach to the negotiations and begins to show some flexibility. The antagonism it has shown both Mexico and now Canada is generating substantial political opposition on Capitol Hill, and as the retaliatory tariffs begin to be felt in the heartland, we suspect the political pressure on Trump will mount further.

That said, any deal at this point will have to be addressed by the new Congress in 2019 and by the new (most likely) AMLO administration. If the Democrats take the House, it’s simply unclear how they might vote on a proposed new NAFTA deal. The biggest wild card by far is whether President Trump further escalates by announcing a withdrawal from NAFTA. It is not inconceivable that he would do so in an attempt to further animate his base before the midterm elections. Regrettably, at this point, all we can say with any certainty is that we are in for a period of great uncertainty.

Mexican politics

We are now barreling toward the July 1 presidential election in Mexico. Recent polls show a uniform and clear tendency in Mexican voter preferences—Andrés Manuel López Obrador has a large and growing lead that looks increasingly impossible to surmount. His party, Morena, is also well-positioned to win a majority in the national legislature, as well as four to six of the nine governorships in play on July 1. This outcome would substantially strengthen AMLO’s presidency and governance—an outcome that was almost inconceivable in the recent past.

However, Morena is unlikely to have a two-thirds congressional majority and will not control a majority of Mexican state legislatures, which together are needed to change the constitution.

Most Mexican business leaders are clearly worried. Several have publicly insisted that an AMLO presidency would have a negative impact on the nation and have called on their employees to vote against him. AMLO’s response has been consistent. He accuses these business leaders of unfairly attempting to influence the vote of their employees, of influence trafficking, and of being part of Mexico’s mafia of power. But he and his surrogates have also met with key private sector actors, both national and foreign, to explain their policy proposals, while regularly insisting that AMLO is not a threat to the private sector.

The Mexican economy continued to outperform expectations, and inflation continued to fall in May. But the peso sank throughout the month, reflecting problems in the NAFTA negotiations and concerns over an AMLO victory.

The broader private sector and foreign investors have a more sanguine attitude about a potential AMLO presidency. They appear to have concluded that his primary concern is the market-distorting special treatment that key private sector participants have enjoyed for decades rather than capitalism in general.

Meanwhile, the Mexican economy continued to outperform expectations, and inflation continued to fall in May. But the peso sank throughout the month, reflecting problems in the NAFTA negotiations and concerns over an AMLO victory. Meanwhile, two Mexican business confederations demanded that the government do more to respond to a crime wave that has 2018 on path to be the most violent in recent Mexican history.

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Michael Camuñez is a Pacific Council Director, chair of the board’s Audit Committee, and president and CEO of Monarch Global Strategies.

A version of this article was originally published by Monarch Global Strategies.

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The views and opinions expressed here are those of the author and do not necessarily reflect the official policy or position of the Pacific Council.