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How to Renegotiate NAFTA

WASHINGTON, DC – US President Donald Trump’s administration says that it is sticking with its campaign promise to renegotiate the North American Free Trade Agreement. Indeed, Trump has now reiterated his intention to invoke the procedures for renegotiating NAFTA soon (within “the next two weeks”), triggering a 90-day consultation period with the US Congress, before talks with Mexico and Canada commence. Assuming that happens – a very big if – it is worth asking how renegotiation could be done right.

Of course, Trump could simply decide to abandon his promise to renegotiate NAFTA, which may be unpopular with many Americans, but is considered by economists to have been beneficial. After all, he has dropped many other campaign pledges, including (fortunately) his oft-repeated vow to label China a currency manipulator “on day one” of his administration.

Another possibility would be for Trump to attempt to bully Mexico – the main target of his renegotiation plans – by, say, raising tariffs, in violation of NAFTA and World Trade Organization rules. In that case, it would be up to Mexico to respond. And Mexico does have some options. For example, it could raise tariffs to its old high “bound rates,” buying more corn from Brazil and Argentina and less from US farmers.

Moreover, trade is not the only area where Mexico could retaliate. It could permit Central American migrants to pass through Mexican territory to the US border, rather than impeding them, as it currently does. It could curtail cooperation with US law-enforcement authorities in areas like drug crime. Most worrying, the Mexican people could respond to US provocation by electing their own nationalist president, Andrés Manuel López Obrador, in 2018.

But let us take at face value, if only for the sake of argument, that the Trump administration wants to renegotiate NAFTA in good faith. In that case, Mexico’s leaders say, “Okay, let’s get on with it.” In fact, the 23-year-old agreement could be improved in various ways.

For starters, NAFTA could be expanded to cover issues that did not exist when it was originally negotiated, such as e-commerce and data localization. Protections for labor could be improved as well, by guaranteeing workers’ right to form independent unions, banning child labor, and strengthening enforcement against human traffickers.

Likewise, negotiators could boost environmental protections, such as measures to safeguard the oceans and provisions for enforcing bans on illegal logging and trade in endangered species. These additional protections could be backed up by a dispute-settlement process and threats of trade penalties that are as credible as those underpinning the resolution of ordinary mercantile disputes.

There is also room for increased protection against corporate abuse of the investor-state dispute-settlement procedure. For example, negotiators could add provisions for the summary dismissal of frivolous suits, such as challenges by multinational corporations to a new regulation on the grounds that it will diminish their ability to earn profits.

Finally, NAFTA could be expanded to include more countries. The addition of some in South America, such as Peru and Chile, and others in Asia and the Pacific, would constitute a broader multilateral approach that could bring significant benefits. Though the Trump administration has expressed a preference for bilateral trade deals, it is easier to conclude mutually beneficial deals when more countries are involved.

For example, US dairy producers want Canada to reduce import barriers for their products, but Canada wants Japan to remove barriers to its pork, beef, and wood products more than it wants anything from the US. So the best way for the US to get what it wants from Canada could be to bring Japan into the mix. Including Japan and other Asian and Latin American countries is more likely to satisfy the main requirement of an effective trade agreement: that each member clearly sees the export opportunities to be gained.

Bringing more countries into NAFTA could be beneficial in another way, by making it easier for firms to deal with the rules of origin that govern various US trade agreements. Rules of origin are meant to prevent products that are assembled in a signatory country but that derive much of their value-added elsewhere from receiving duty-free treatment.

The rules are currently so onerous that some US importers reportedly choose simply to dispense with the benefits of NAFTA – and the accompanying paperwork – and instead to pay the low normal tariff imposed on non-NAFTA products. Yet White House adviser Peter Navarro wants to make the rules of origin even more demanding, by raising the share of local content required for a product to qualify for zero tariffs. He believes that this would raise the local value-added in North American trade. But a likely result is that more importing firms would dispense with NAFTA’s benefits and simply default to the normal US tariff rate, which averages just 3.5%.

Is renegotiating NAFTA to cover new issues, strengthen labor and environmental protections, improve dispute-settlement mechanisms, and include more countries all pie in the sky? Would it be impossibly difficult to negotiate a new agreement that had every one of these desirable properties? Well, trade negotiators already hammered out precisely such an agreement. It was called the Trans-Pacific Partnership, which Trump has nixed. In truth, the best way to improve NAFTA would be to return to what was agreed to in the TPP.