Trade Rumors (NAFTA Edition)

Jul 31, 2018 - 12:00pm

Senior Vice President for International Policy

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Canadian, American and Mexican flags stand on stage ahead of the first round of North American Free Trade Agreement negotiations in Washington, D.C.
Canadian, American and Mexican flags stand on stage ahead of the first round of North American Free Trade Agreement negotiations in Washington, D.C.

Trade rumors always swirl in late July. This year, the usual Major League Baseball scuttlebutt is mixed with rumors about a surge of momentum toward a new North American Free Trade Agreement (NAFTA).

Some of these reports will be borne out, but others are indeed just rumors. Let’s take some of the chief rumors head on:

“A breakthrough is imminent”

Maybe.

There are multiple reports of progress in the U.S.-Mexico negotiations relating to the NAFTA’s regulations for the auto manufacturing sector – known as “rules of origin.” This was the chief focus (and chief obstacle) when negotiations largely came to a halt in mid-May.

It makes sense that this part of the negotiations is being conducted bilaterally because the United States is the demandeur and Mexico is the U.S. target. This is especially so with regard to the U.S. insistence on rules to require that a certain share of an automobile be manufactured by workers receiving wages of $15-$17 per hour in order to qualify for duty-free treatment under the agreement. Canada is largely a bystander to this argument.

It’s worth recalling that the U.S. auto industry is extraordinarily united in opposition to the administration’s proposal to expand dramatically its “rules of origin” regulations for auto manufacturing. By raising costs for U.S. manufacturing, it would likely backfire, driving at least some auto production and jobs offshore. However, the United States may be softening its stance.

But even if the United States and Mexico reach a deal on autos, there are a host of other tough disagreements that have yet to be resolved – and lots of grunt work to conclude more than a dozen other substantial chapters.

“There’s a new flexibility in the air”

Maybe.

It’s important to recall that, since last fall, the true impediment to concluding a modernized NAFTA has been USTR’s insistence on a collection of “poison pill” proposals opposed by the U.S. business and agriculture communities, Congress, and the governments of Canada and Mexico. The auto “rules of origin” issue is just one of these, but there are others, and it seems unlikely there will be much progress until USTR shows flexibility on these issues:

Enforcement: When it comes to trade agreements, Congress, the business and agriculture communities, and most Americans like them “strong and enforceable.” However, USTR has proposed to make compliance with dispute settlement rulings purely voluntary. This could very well lead to a situation where governments are free to ignore their commitments with impunity.

Sunset clause: USTR has proposed a five-year sunset clause for NAFTA 2.0 under which the agreement would automatically expire unless all three parties agree it should continue. This will create uncertainty and undermine the business confidence needed to foster investment in job-creating enterprises. Simply extending its term won’t help much; it needs to be scrapped.

Investor protections: USTR has proposed to weaken NAFTA’s investor protections – which echo the U.S. Constitution’s protections against arbitrary government actions and taking of property without compensation – by eliminating the international arbitration procedures that enforce these protections (known as Investor-State Dispute Settlement). Gutting these basic rule-of-law protections – when the United States has never lost a case – would put many U.S. industries at a disadvantage.

Government procurement: USTR is proposing to cut back dramatically the reach of the government procurement rules in NAFTA, a proposal that promises no benefit and considerable harm to U.S. job creators. In reality, it is exceedingly rare for Canadian and Mexican firms to even bid on U.S. procurements – let alone win them – while U.S. businesses do very well in procurements in those two countries, supporting thousands of jobs back home.

“A U.S.-Mexico agreement will come first”

No.

It makes sense for some aspects of negotiations to be conducted bilaterally, but replacing the three-party NAFTA with bilateral agreements is almost certainly not happening.

The reasons are straightforward: Given that Canada and Mexico share a firm opposition to nearly all the “poison pills” named above, a bilateral approach would not break the logjam. Further, the U.S. business and agriculture communities benefit from a common set of rules that span the North American economy; replacing these NAFTA rules with two separate schemes would add to compliance costs and suppress job growth here at home.

Perhaps most importantly, it just isn’t tenable politically for Mexico to approve an agreement with the United States that is deemed “not good enough” for Canada. “Selling” such an agreement would be politically impossible. Both the outgoing and incoming Mexican administrations are categorically rejecting the possibility that they would pursue a bilateral agreement with the United States.

Further, Canadian and Mexican officials reaffirmed their strong, shared commitment to keeping NAFTA trilateral when they met last week – the day before Mexican officials resumed talks with the United States.

“Canada is the real problem.”

In a word: no.

Recent months have featured the peculiar spectacle of Canada being painted as the protectionist villain of the NAFTA modernization story. Lost in some of the news reports is the reality that 99.9% of U.S. exports enter Canada duty free under the existing NAFTA pact. The U.S. Chamber has not shied away from pointing out Canada’s shortcomings in such areas as intellectual property, dairy, or de minimis, but these need to be kept in perspective.

To reiterate, the U.S. “poison pill” proposals listed above remain the chief obstacles to concluding a modernized NAFTA, and they are opposed by many in Congress, the U.S. business and agriculture communities, and the Mexican government – not just Canada. Getting past the poison pills and focusing on these true modernization provisions should be job one at this stage.

About the Author

About the Author

Senior Vice President for International Policy

Murphy directs the U.S. Chamber’s advocacy relating to international trade and investment policy.