As negotiations to update the North American Free Trade Agreement (NAFTA) enter their fourth round, we’ve come to a crossroads. While the American business and agriculture community broadly supports measures to modernize the pact, the Trump administration is pushing a series of proposals that violate its pledge to “do no harm” in the negotiations.
On the contrary, a number of these proposals would be genuinely damaging if put into place. Some would directly raise costs for American manufacturers and incentivize the offshoring of jobs (e.g., proposals to sharply increase NAFTA’s “rule of origin”). Others would not benefit any U.S. workers, farmers, or companies but would, in fact, harm many (e.g., the proposal to dramatically scale back the agreement’s procurement rules).
A number of these proposals are certain to fail at the negotiating table, threatening to blow up the talks and, according to the administration, leading to the agreement’s collapse.
One of the worst proposals is a so-called “sunset clause,” which would provide the president with “expanded termination latitude” according to Inside U.S. Trade [subscription required]:
The U.S. reportedly is proposing enhanced exit discretion, following a five-year period, tied to the U.S. trade deficit. The proposal doesn’t get into specific deficit levels but is designed, one source says, to provide “a lot of discretion to the president.”
Why is this proposal dangerous? Why is it opposed by the vast majority of the U.S. business and agriculture community, trade leaders on Capitol Hill, and the Canadian and Mexican governments?
Because it undermines one of the central goals of any trade agreement: Namely, to provide the certainty and confidence about the business environment that supports long-term investment, economic growth, and job creation.
This isn’t news, really. In widely cited comments, former Secretary of State Colin Powell captured this general truth years ago:
Capital is a coward. It will go nowhere where it is put in fear. It does not want to be around political unpredictability or instability.
U.S. Trade Representative Robert Lighthizer has also spoken about the cost of uncertainty, including that surrounding the NAFTA modernization talks. In remarks at CSIS, he recently said:
We don’t know whether we’re going to get to a conclusion, that’s the problem… The whole process is having real life effects on real farmers and ranchers and businesses—people who are trying to do business… So there are reasons to move quickly on a renegotiation… The alternative is that you would stretch this out for a period of years, and you would have a real negative effect… on real people… selling products.
This is exactly right. Unfortunately, including a sunset clause in the NAFTA would make permanent the uncertainty that Lighthizer is citing as a reason to move quickly in the negotiations.
Consider the NAFTA’s tariff provisions. The agreement eliminated all tariffs on North American trade with a few exceptions. With this assurance that border taxes have been eliminated—permanently, it has long been assumed—industries have made investment and hiring decisions for the long haul.
Today, 14 million American jobs depend on trade with Canada and Mexico, and more than 4 million of these U.S. jobs depend on the increased trade brought about by the NAFTA. Returning to the high trade barriers that preceded the NAFTA would slice through many of the ties that connect suppliers to businesses—and businesses to customers—endangering the livelihoods of these workers.
The possibility that such a sunset clause could be invoked would be felt in the trade-dependent states across mid-America—many of which voted for the president. This includes industrial states such as Michigan and Ohio that send more than half their exports to Canada and Mexico. As the National Association of Manufacturers points out, “U.S. manufactured goods exports to Canada and Mexico alone support the jobs of more than two million men and women in the United States.”
It also includes agricultural states across the heartland that send a huge share of their crops to our North American neighbors. The American Farm Bureau Federation, in a joint statement with its Canadian and Mexican counterparts, recently reiterated its call that
… NAFTA re-negotiations should aim to modernize the agreement, rather than dismantle it… agriculture represents one of NAFTA's biggest success stories… Agriculture industries in each NAFTA country would greatly suffer from disruptions to trading relationships developed over the last 23 years.
Also vulnerable would be more than 125,000 small and midsized companies that export to Canada and Mexico—far more than to any other markets. Entrepreneurs from every state and sector have grown their businesses and added to their payroll thanks to their ability to sell into these export markets, making them our largest in the world.
It’s hard to imagine a proposal that would do more to create uncertainty and undermine the business confidence needed to foster investment in job-creating enterprises. As surely as night follows day, including a “sunset clause” in the NAFTA would mean lost economic growth and lost American jobs.