The Risks and Rewards of Renegotiating the North American Trade Relationship

Abstract

The North American Free Trade Agreement (NAFTA), despite much criticism, had led to significant advantages for all Parties: total goods and services trade approaches $1.2 trillion annually; one of the most efficient automotive production sectors in the world; extensive U.S. exports of agricultural products, with Canada ($21.8 bn) and Mexico ($18.3 bn) representing the United States’ first and third most important export destinations; supply chains that allow North America to compete with European and Asian manufacturers that have ready access to lower labor cost for labor intensive manufacturing operations. U.S. exports to Mexico alone are estimated to be responsible for millions of U.S. jobs.

Still, NAFTA has become a whipping boy for other problems with US manufacturing employment. The U.S. deficit with Mexico is about $60 bn on total trade of $531 bn, which appears to be the Administration’s major concerns. Some U.S. manufacturing jobs have undeniably been lost to Mexico, but some 75% of job losses in past two decades are due to automation rather than job losses to Mexico or China. The largest U.S. trade deficits are with nations where the US has no FTA (China, Germany and Japan) so blaming them on regional trade agreements seems illogical. Both major political parties have failed over the past 3-4 decades to assist the losers from globalization to adjust to the pressures of international competition, and failed to agree on long-delayed corporate tax reform that could encourage more manufacturing in the United States.

The Trump Administration originally demanded renegotiation of NAFTA in order to reduce the U.S. trade deficit, keep more manufacturing jobs in the United States and cause Mexico to pay for a border wall. None of these objectives is attainable through a revised NAFTA, as the first two in particular are the antithesis of free trade agreements, and the latter if agreed to by Mexico would likely topple the government. Still, the 23-year-old NAFTA could benefit from updating in such areas, inter alia, as improved investor-state dispute settlement (with enhanced host country regulatory flexibility; better labor and environmental protection; compensation law disciplines; support for SMEs; coverage of E-commerce; and improved government procurement.

It is this dichotomy that is the focus of the present article. Will the Trump Administration be prepared to agree with Canada and Mexico on a modernized NAFTA that preserves its trade and investment liberalization features, or will it insist on an agreement that is protectionist in terms of trade and investment within North America? If U.S. insistence on rules or origin that require a 50% U.S. (rather than regional) content, effective elimination of all third-party dispute settlement and a five-year “Sunset” clause, among others, continues the negotiations will fail and the United States will terminate NAFTA with regard to Mexico and perhaps to Canada as well. Such termination would result in serious negative consequences for each of the North American economies and a significant loss of North American manufacturing competitiveness world-wide.

Keywords: international trade, NAFTA, regional trade agreements, international economic law