Trump's NAFTA Agenda: The Good, the Bad, and the Indeterminate

The Trump administration’s “Summary of Objectives for the NAFTA Renegotiation,” circulated by the United States Trade Representative (USTR) July 17, paves the way for negotiations on the North American Free Trade Agreement (NAFTA) to begin next month. The USTR document, the first detailed outline of the administration’s agenda, contains positive and negative elements and features that are imprecise but risky. It is too soon to tell whether the net outcome will help or hurt the US or world economy. My appraisal of the most important issues is as follows.

The Good

1. The Trump agenda proposes a series of relatively new trade issues along the lines already agreed in the Trans-Pacific Partnership (TPP), negotiated under President Obama but rejected by Trump. These are intended to modernize the 23-year old NAFTA agreement. They include digital trade, ecommerce, cross-border data flows, localization requirements, and disciplines on state-owned enterprises.
2. Nontariff barriers in a number of sectors are to be aggressively liberalized, in an effort to expand market access for US exports and investments. The emphasis is properly on services and agriculture rather than manufacturing, which is declining and already open. There are no suggestions of managed trade—i.e., setting numerical goals or limits on exports and imports—or of modifying the partner countries’ tax systems.
3. The document repeatedly supports the World Trade Organization (WTO) and the principle of reciprocity in trade concessions, indicating endorsement of fundamental features of the multilateral trading system.
4. The United States, the document says, is willing to reduce some of its own remaining barriers, giving as well as getting and thus strengthening the prospects for a successful negotiation. Also acknowledged is the principle that existing duty-free markets for industrial and agricultural products are fully reciprocal.

The Bad

1. The primary stated objective is to “reduce the trade deficit with the NAFTA countries.” But the United States has no trade deficit with Canada, and both Canada and Mexico run larger global deficits (as a share of their economies) than the United States, so insistence on this goal could blow up the negotiation. The overall US trade balance and economy cannot be improved by cutting bilateral deficits anyway.
2. The proposed elimination of the global safeguard exclusion for NAFTA partners and the Chapter 19 dispute settlement mechanism, along with a new import early warning system, would open the door for additional import restrictions.
3. Tightening the North American rules of original (ROO), and adding separate ROO for US national production, would limit the amount of content produced outside the region in goods qualifying for lower tariff barriers to the United States. Such rule changes could significantly disrupt supply chains (especially for autos) and hurt all three countries. There is no reference to the needed streamlining of the ROO or strengthening the international competitiveness of North America as a whole.
4. Maintaining “Buy America” requirements and ruling out liberalization of subfederal procurement, as called for in the document, would increase US costs and contradict the laudable goal of expanding US exports to governments in Canada and Mexico.

The Indeterminate but Risky

1. The brevity of the section on energy greatly understates the scope for substantial progress in that sector due to recent Mexican reforms, enhanced Canadian productivity in its oil sands, and the fracking revolution in the United States.
2. The inclusion of a proposal outlawing currency manipulation is positive, but as there is no currency manipulation by either Canada or Mexico, it is unclear whether the goal is to simply replicate the toothless side agreement to the Trans-Pacific Partnership or to insist on “enforceable disciplines,” as urged by many members of Congress as a template for future US trade agreements.
3. The call to “establish” an effective dispute settlement mechanism ignores the existence of such mechanisms in the current agreement.
4. The repeated references to textiles and apparel are peculiar in light of the much greater importance of many other sectors.

Greater clarity on this last set of issues, and on the tradeoffs that will be pursued on the “good” versus the “bad,” will emerge over the coming weeks as the domestic consultations proceed and the actual negotiations commence. A positive outcome for all three countries is distinctly possible if proper choices are made. Serious retrogression and even a calamitous collapse of the agreement, as threatened when President Trump actually decided to withdraw from it on April 22 (but subsequently reversed himself), is possible if they are not. The continuous, and hopefully further, improvement of NAFTA remains to be decided.