The Trump Administration’s Potentially Constructive Objectives for NAFTA

March 30, 2017 4:45 PM
Photo Credit: 
REUTERS/Eric Thayer

After a campaign in which presidential candidate Donald Trump vilified the North America Free Trade Agreement (NAFTA) as one of the worst trade deals in history, the Trump administration has come forward with a welcome signal that it intends to update and improve NAFTA but not torpedo it. In a few areas, as expected, new US goals sharply deviate from past US practice and the provisions of the US trade promotion authority (TPA) passed by Congress in 2015. These need clarification and revision. But in a draft letter circulated to Congress and made public on March 30, the administration follows the TPA template set by Congress and seeks outcomes comparable to those achieved in the Trans-Pacific Partnership (TPP) in several areas. These include digital trade and cross-border data flows, disciplines on state-owned enterprises, and environment and labor “subject to the same dispute settlement and remedies as other enforceable obligations.”

The 8-page letter highlights specific US negotiating objectives in general terms. It emphasizes that “the persistent US deficit in goods trade with Canada and Mexico demands…swift action.” Of note, despite the avowed objective to Trump advisers to establish a trade approach that reduces trade deficits with its trading partners, the letter does not propose specific provisions related to the size of bilateral deficits. Rather, the letter suggests focusing on new and revised rules and their “effective implementation and enforcement.”  

In large measure, the newly public letter is consistent with comments by both Commerce Secretary Wilbur Ross and Treasury Secretary Steven Mnuchin, who have argued that some TPP provisions provide useful precedents for new or revised trade pacts.

In a few areas, however, the Trump administration’s objectives could derail trade talks even before they start. The big “wild card” is the goal “to level the playing field on tax treatment.” What that means in concrete terms will depend on the outcome of congressional deliberations on US tax reform and whether new legislation includes border adjustments that effectively raise the cost of US imports. But the language also is a veiled threat, often voiced overtly by President Trump, to impose new import duties against Mexico. Such duties would violate US obligations under NAFTA and the World Trade Organization (WTO).

The other wild card is how the United States seeks to change NAFTA rules of origin—basically criteria that establish how much of a good’s value must originate in the NAFTA area to qualify for NAFTA’s zero tariffs. The letter simply states that the origin rules should “ensure that the Agreement supports production and jobs in the United States.” But what the Trump administration means is that the rules should be modified to require that more content come from US factories, not Mexican or Canadian or non-NAFTA countries. That demand could disrupt existing supply chains that are designed to enhance the competitiveness of North American production. If new origin rules raises the cost of production of automobiles and other products, US firms could lose sales to foreign competitors in both the US and third-country export markets.

The letter also incorporates Trump’s insistence on strong Buy America policies for US government contracts. Big money is at stake, especially if the Congress authorizes massive new spending on US infrastructure projects, affecting steel and many other products. The administration’s new Buy America policies would reduce access that Canadian and Mexican firms already have in bidding on US public procurement and probably would lead those countries to scale back access of US firms to their government contracts. The US policy thus might backfire, however, making it harder for US firms to compete for Mexican and Canadian contracts against other trade partners of those countries that get procurement preferences under bilateral trade pacts.  

The fourth big change from past practice is the goal of dropping binational reviews of final determinations of antidumping and countervailing duty cases. These review procedures, contained in NAFTA chapter 19, were a key Canadian demand before accepting the US-Canada FTA in the 1980s and were carried over into the NAFTA. Very few reviews have been held in recent years, but the process is integrally entwined with the longstanding US-Canada dispute over softwood lumber, where US firms have challenged Canadian logging policies as countervailable subsidies. Over the past 35 years, this dispute has been argued before NAFTA chapter 19 and WTO panels. Canadian officials see chapter 19 reviews as a restraint on abusive US litigation and would be hard pressed to accept their deletion in the absence of a definitive resolution of the softwood lumber case.

Finally, the letter addresses investor rights and commits to “maintain and seek to improve procedures to resolve disputes between US investors and the NAFTA countries.” The letter mentions areas where existing investor-state procedures (in NAFTA chapter 11) can be improved, including some reforms that were introduced in the TPP.

Overall, the Trump administration has set out objectives for updating NAFTA that, in large measure, could propel constructive new trade talks with Mexico and Canada. But a few elements could risk significant disruption to North American production and trade and adversely affect the competitiveness of US firms and workers.

Fortunately, the draft letter is just that: a draft subject to revision in negotiations between Congress and the administration before the letter is actually submitted to Congress by the new US trade representative, once he is confirmed by the Senate. In the interim, the two sides should revisit the problem areas noted above to ensure that the revised deal strongly promotes US exports and broader US economic interests. 

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