Flaws in Trump’s Agenda for NAFTA

July 20, 2017 9:45 AM

The Trump administration’s objectives in renegotiating the North American Free Trade Agreement (NAFTA) contain no big surprises. Talks will begin in mid-August 2017. But NAFTA negotiators will have a tough time reaching agreement because of the long list of US demands for concessions by Canada and Mexico and likely US resistance to their demands for reciprocal steps benefitting them.

The US objectives—published on July 17 on the US Trade Representative (USTR) website—featured one demand certain to be rejected outright: the ill-considered goal of reducing the (merchandise) trade deficits with Canada and Mexico. Requiring balanced bilateral trade is economic nonsense and would disrupt the talks. On the other hand, often cited demands by President Trump for a level playing field for tax treatment, imposing new US tariffs to offset Mexican and Canadian rebates of value-added taxes, were omitted from the document.

Overall, the US goals comprise a hodgepodge of reforms mandated by Congress in the 2015 Trade Promotion Authority. Many of the US goals closely reflect provisions included in the Trans-Pacific Partnership (TPP), including those covering labor, environment, and digital trade. Others go beyond TPP reforms, such as liberalization of nontariff barriers affecting farm goods, customs rules on low-value shipments, and prohibition of data localization requirements on financial services providers. In three important areas, however, US officials may seek specific changes in existing NAFTA provisions that could disrupt negotiations.

US demands to use the talks to improve the US trade balance with its NAFTA partners could pose the biggest risk to a prospective accord. US trade in goods and services with Canada already is in balance; Mexico runs a sizeable goods trade surplus, which is the obvious target of US ambitions. Trump can claim credit for the likely increase in Mexico’s energy imports from the United States in the coming years, but the NAFTA reforms sought by the United States won’t make a significant difference to the US bilateral trade balance. If the United States insists on balanced trade obligations, Canada and Mexico should and will walk away from the negotiating table.

Another fractious issue could be reworking the rules of origin, especially for autos. The USTR paper seeks to “update and strengthen” existing rules and “incentivize the sourcing” of inputs from US and North American firms. Simply put, they want firms to source a larger share of their inputs from suppliers in NAFTA countries instead of from Asia, Europe, or other countries outside the region, and to deny NAFTA tariff preferences to firms that don’t. For US automakers, doing so would increase production costs and undercut their competitiveness vis-à-vis foreign producers (who can still enter the US market paying only a 2.5 percent tariff). US officials could get strong pushback not only from their NAFTA counterparts but also from US manufacturers!

Third, Canada and Mexico probably will strongly resist US demands to delete NAFTA Chapter 19 (which provides for NAFTA panel review of final antidumping and countervailing duty determinations) and end the exemption of Canada and Mexico from US global safeguards measures, especially if US officials offer in return only token concessions in other areas. Canada insisted on the inclusion of Chapter 19 as a compromise when the United States refused to exempt Canada from US antidumping and countervailing duty measures in the Canada-US FTA. Trump administration officials believe Chapter 19 reviews are biased against US interests and don’t want a special NAFTA review of US antidumping and countervailing duty measures. Chapter 19 reviews have largely targeted US measures, but there is little evidence of bias in the NAFTA review process. Moreover, there have been only a handful of cases in recent years. Nonetheless, Canadian and Mexican officials don’t want to abolish ex post NAFTA reviews at a time when US officials are ramping up use of US unfair trade statutes, so US demands will face strong opposition in the NAFTA talks.

I draw two final conclusions from the USTR objectives for renegotiating NAFTA. First, covering the extensive list of negotiating objectives will require protracted effort. If the three countries want to expedite the negotiating process, they will have to limit revisions to the existing pact. Second, NAFTA negotiators need to avoid major changes in the contentious issues noted above. Each of those explosive issues could be defused by careful negotiation and compromise. Insisting on US demands posted on July 17 could put the nascent trade talks in peril.

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