Guest Contribution: “How to Re-Negotiate NAFTA”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared on April 22nd in Project Syndicate.

The Trump Administration says it is sticking with its core campaign promise to renegotiate NAFTA, which remains unpopular with many Americans even though economists think it has been beneficial. The President said again on April 20 that he will invoke the procedures for renegotiating the trade agreement soon (within “the next two weeks”). After that comes a 90-day consultation period with Congress before actual talks begin. It is worth asking how it could be done right.

Of course Mr. Trump could any day think it over more carefully and abandon the promise, as he (fortunately) has now done with the oft-repeated pledge to name China a currency-manipulator on “day one” of his administration and with so many other promises. For now, however, businesspeople and government officials have little choice but to consider the possibility that the currently stated policy will be in fact be pursued.

If the US tries to bully its smaller neighbor, for example to raise tariffs in violation of NAFTA and the WTO, Mexico has some options. It could:

  • Raise tariffs to its old high “bound rates” (without violating NAFTA or the WTO)
  • Buy more corn from Brazil and Argentina instead of the US.
  • Accelerate trade agreements with other countries.
  • Allow the passage of Central American migrants through Mexican territory to the US border, rather than impeding them as it currently does.
  • Curtail cooperation with US law enforcement authorities in areas such as drug crime.
  • Suggest that a re-opening of NAFTA should be accompanied by a re-opening of the 1848 Treaty of Guadeloupe Hidalgo which, at the point of a gun, ceded half of Mexico’s territory to the US, including California and the rest of today’s southwest. Perhaps Anglos who have moved to these territories since then would be asked to present documentation papers to the Mexicans who were there before them. (Well, maybe this option is less practical.)
  • Most worryingly, Mexicans could retaliate against US provocation by electing as president their own nationalist, Andres Manuel Lopez Obrador in 2018.

But if only for the sake of argument, let us take at face value that the Trump Administration may want to renegotiate NAFTA in good faith. Mexico’s leaders, for their part, have taken the position that if renegotiation is what the US wants, then “let’s get on with it already”.
It has been 23 years since the three-country trade agreement went into effect. If NAFTA is seriously to be renegotiated, how could it be improved? Consider six ways it could be improved.

  1. Updating for some new issues that did not exist when NAFTA was originally negotiated, such as e-commerce and data localization.

  2. Greater protections for labor, such as guaranteeing throughout the region that workers can form independent unions, banning child labor, and strengthening enforcement against human trafficking.

  3. Greater protections for the environment, such as steps to protect the oceans and provisions to enforce bans on trade in endangered species and illegal logging.

  4. The backing up of environmental and labor provisions by a dispute settlement process and threats of economic penalties that are as serious as those that back up regular mercantile disputes.

  5. Some protection against corporate abuse of Investor-State Dispute Settlement. There should be provision for summary dismissal of frivolous suits, such as when a multi-national corporations challenges a new regulation simply on the grounds that it diminishes their ability to earn profits.

  6. The inclusion of more countries in the agreement. Good candidates would be some in South America, including Peru and Chile, and others in Asia and the Pacific. There are various benefits to a broader multilateral approach.

    • For one thing, even though the Trump Administration has expressed a preference for making bilateral deals (and for targeting bilateral trade balances), it is in fact easier to come up with deals that benefit everyone when more countries are in the deal at the same time. For example, as Trump has found out, US dairy producers want Canada to reduce barriers to US dairy products. But Canada wants Japan to remove barriers to its pork, beef, and wood products, more than it wants anything from the US. A trade agreement that includes Japan and other Asian and Latin American countries is more likely to satisfy the requirement that each member sees clearly what export opportunities are in it for them.

    • For another thing, bringing more countries into the agreement might make it easier for firms to deal with the Rules of Origin that govern various American trade agreements. These are provisions that are written to prevent Americans, for example, from buying tariff-free products that are assembled in Canada or Mexico but derive much of their value-added in Asia or elsewhere. The Rules of Origin are currently so onerous that some US importers reportedly choose simply to dispense with the benefits of NAFTA and the accompanying paperwork and instead to pay the low normal tariff that would apply even without NAFTA.

    • Instead of streamlining the rules of origin for US trade, White House advisor Pater Navarro actually wants to make them more demanding by requiring a higher share of local content in order for a product to qualify for NAFTA duty-free treatment. But this approach is unlikely to be very effective. Rather than responding by raising the local value-added in North American trade, it could lead even more importing firms to dispense with the benefits of NAFTA and choose instead to default to the normal US tariff rate (even if the product includes a lot of imported inputs from outside the region). The average normal rate [“bound rate”] for US tariffs is only 3 ½ per cent. The reason is that the US unlike Mexico had low tariffs even before negotiating NAFTA.

Six ways to improve NAFTA: Updating for new issues, strengthening protections for labor and the environment, improving settlement mechanisms, and including more countries in the agreement…. Is this all pie in the sky? Would it be impossibly difficult to negotiate a new agreement that had every one of these desirable properties? The trade negotiators already did it. It is called the Trans-Pacific Partnership.

This post written by Jeffrey Frankel.

4 thoughts on “Guest Contribution: “How to Re-Negotiate NAFTA”

  1. Erik Poole

    Excellent piece. In these times a sense of humour is also appreciated.

    Modern trade agreements might be a respectful way of negotiating higher environmental, labour and human rights standards but quite frankly does the Trump base care? My impression is that core Trump supporters do not care.

    I also suspect that Trump base places a near zero probability on the likelihood of effective retaliation. After all, these trade agreements were apparently misguided give-aways by generous liberals.

    The once popular spectator sport of US hegemonic decline watch is back on.

  2. joseph

    All this talk about Mexico but who does Trump go on the attack first — Canada about lumber and milk. Recall that Trump was in Wisconsin last week and he only remembers the last person he talked to when it comes to any policy issue.

  3. Erik Poole

    joseph: Canadian dairy and lumber are long-running sore points as are massive subsidies to American agriculture.

    Canada is vulnerable on dairy and lumber. Though if Trump is not careful counter-vailing duties on US agricultural exports are a possibility. I doubt his rural base would appreciate that, especially after he reduces agricultural sector access to cheap foreign labour.

    Mind you, if Canada wants to give away timber from crown lands at bargain prices, the US housing sector and US consumers can only benefit. Unfortunately, some Canadian politicians still see the forestry sector as a source of well-paying jobs for semi-skilled workers.

  4. joseph

    Erik, so you think it is just a coincidence that Trump makes a trip to Wisconsin and then a few days later makes his first tariff threats. not about Mexico, which he has talked about incessantly for over a year, but about Wisconsin? Trump is a dunce who only remembers the last thing he heard about any particular issue.

    By the way, dim-witted Trump refers to Wisconsin as a “border state”, which is news to everyone in Wisconsin.

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