NAFTA Doesn’t Need a Senseless Sunset

September 19, 2017 10:00 AM
Photo Credit: 
REUTERS/Edgard Garrido

The Trump administration wants a revised North American Free Trade Agreement (NAFTA) to include a sunset provision terminating the pact after five years unless all three countries approve its renewal. Such a clause would insert a fixed expiration date for NAFTA and require positive and politically fraught decisions to maintain tariff-free access to the three markets.

Sunset clauses have never been included in US trade agreements for the simple reason that they undercut the basic economic benefits of the deal. The added uncertainty over the future policy outlook in North America, and the threat of revived US import restrictions and higher tariffs against US exports, would discourage investment and dampen growth prospects in all three countries. The Trump administration’s sunset proposal is senseless … and unnecessary.

Sunset clauses have never been included in US trade agreements because they undercut the basic economic benefits of the deal.

Flaws in trade pacts, whether due to negotiating error or changes in market conditions, can be remedied by NAFTA’s amendment procedures or termination clauses. Because the former can be difficult and time-consuming, and the latter drastic and disruptive to output and employment in each partner country, NAFTA also contains provisions that delegate powers to the trade ministers—meeting together as the NAFTA Free Trade Commission—to interpret or modify specific rules or obligations of the pact. Over the past 23 years, NAFTA trade ministers have done so both to narrow the application of investor-state dispute settlement provisions and to modify industry-specific rules of origin to support North American production and trade.

Sunset clauses have value when used in the proper context. Multilateral trading agreements under the World Trade Organization (WTO) already include sunset clauses in specific areas:

First, WTO rules require that antidumping (AD) and countervailing duties (CVD) be lifted once the trade-distorting effects of the foreign unfair trade practices have ended and that ongoing AD and CVD orders be reviewed at least every five years to determine whether they should be extended, modified, or removed.

Second, WTO rules also require that safeguard measures—temporary protection that helps domestic industry adjust to injurious import competition regardless of whether the products benefit from unfair trade practices or not—must be time-limited and the protection reduced incrementally. The latter criterion is waived in the case of agricultural products subject to seasonal safeguard measures.

Third, the WTO Agreement on Subsidies and Countervailing Measures, negotiated in the Uruguay Round of multilateral trade negotiations, also provided a 5-year exemption from the prohibition on export subsidies for specified purposes, such as research and development (so-called “green light” subsidies). Article 31 of that accord limited the application of Article 8 on nonactionable subsidies to five years but allowed for consideration of its extension. The exemption for such green light subsidies expired in 1999.

The sunset clause in the Subsidies Agreement is the only precedent that even barely resembles what the Trump administration wants to do for the NAFTA writ large. But, as my colleague Chad Bown reminded me, all three precedents aimed at limiting import restrictive measures, while a NAFTA sunset clause would do just the opposite.

Trade agreements are designed to establish rules to govern trade and investment among the partner countries, making market entry and regulatory requirements for conducting business clear and predictable. Policy predictability enables businesses to better plan their production, trade, and investment strategies to enhance their competitiveness and bolster economic growth.

Adding a sunset clause that terminates the agreement after five years unless a positive agreement is reached to extend it, as the Trump administration proposes, would do the opposite. The threat of termination of NAFTA after five years would generate uncertainty that would constrain investment decisions in all three NAFTA countries and undercut efforts to deepen North American supply chains. We already see evidence of such desultory results as Mexican firms, in the face of President Trump’s ill-considered threats to withdraw from NAFTA, reach out to Asian and Latin American suppliers to diversify away from US firms.

To paraphrase an old admonition, loose lips sink ships—in this case, those carrying US exports throughout the Pacific Basin, including Mexico. US trade officials should carefully reconsider and refrain from sunset proposals that contain bluster but no benefit for the US economy.

Comments

William E. Craft

Great job Jeff.  Exactly right.

John Endean

At a time when the Administration argues against a 10-year budget window for tax cuts so as to insure certainty for business decision-making, it seeks to impose a five-year window on a trade agreement.  The periodic and senseless debate over raising the debt ceiling will look like child's play compared to the inevitable lobbying and brinksmanship necessitated by a drop-dead date for the new NAFTA.  What a disastrous idea.

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