Taking stock of a NAFTA revise

Trump's team priority list provides some clarity on objectives, if few surprises

By: Eric Johnson
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Photo: DarwelShots / Shutterstock.com
   There’s been plenty of ink spilled on the benefits, downfalls and future of the North American Free Trade Agreement (NAFTA) in the first half of 2017
   But the discussion kicked into high gear this past week, as the Trump administration released its NAFTA renegotiation priorities.
   Trade experts were mostly unsurprised by the stated objectives. If anything, the surprising part of the document was the lack of anything that Mexico or Canada would flatly reject.
   “While there are tough issues here for the other countries, I don’t see any obvious poison pills,” said Bill Reinsch, a distinguished fellow with the Stimson Center and longtime Washington, D.C. trade policy expert. “They could well be lurking in the underbrush and will appear later on, but at this point the administration has not shot itself in the foot before taking the first step.”
   One of the big takeaways from the list of priorities focus on increasing the United States’ ability to restrict imports of Canadian and Mexican goods – a mantra that Peterson Institute for International Economics Senior Fellow Chad Brown described as an attempt to take the “free” out of NAFTA.
   “The technical means by which the administration wants to restrict imports involve how the Trump trade policymakers want to treat ‘trade remedies’—i.e., import-restricting policies such as antidumping, countervailing duties, and safeguards—under a new NAFTA,” Brown wrote. “Their specific goal is to make it easier for the United States to access such laws to impose trade restrictions on Canadian and Mexican goods.”
   The other takeaway is that these priorities seem aimed at a bigger picture than NAFTA. While the Trump administration certainly has its gripes with what it considers unfair trade practices by Canada and Mexico that have disadvantages U.S. businesses and workers, there’s a bigger elephant in the room.

While the Trump administration certainly has its gripes with what it considers unfair trade practices by Canada and Mexico that have disadvantages U.S. businesses and workers, there’s a bigger elephant in the room.

   In particular, the section prioritizing the definition of state-owned enterprises (SOEs) and containing the impact of SOE subsidies is fascinating. If the U.S. Trade Representative is successful in negotiating a reduced impact of SOEs in the revised NAFTA, that could serve as a template to bring such a provision into future trade agreements.
   That would, of course, have the biggest impact on trade discussions with China, where highly subsidized SOEs have an enormous impact certain markets.
   The irony this week is that while the Trump administration was laying bare its plans on NAFTA, it didn’t budge China an inch in trade discussions with Beijing. No movement on steel overproduction, no movement on market access for U.S. exports in China.
   If anything, Canada and Mexico seem more adaptable trade partners. Both have said NAFTA is in need of an update, and welcomed the renegotiations. But neither nation will give the president and his trade team a sweetheart deal simply because they would like one.
   Reinsch and Brown pointed out there could be some sticking points. Canada won’t be pleased by a provision to eliminate Chapter 19 of NAFTA, a special procedure for appealing and adjudicating antidumping and countervailing duty actions between members.
   “Chapter 19 is a legacy of the U.S.-Canada Free Trade Agreement that preceded NAFTA,” Reinsch wrote. “The Canadians insisted on it because they felt unfairly treated by U.S. unfair trade practice laws and wanted a means of redress. The Trump administration has marked this for repeal, and it will be interesting to see how big a fight the Canadians put up over it.”
   Brown said Chapter 19 was a factor in the relatively low level of trade barriers the United States erected against Mexico and Canada since NAFTA was passed.
   “Many factors contribute to the fact that the United States applied antidumping, countervailing duties, and safeguards against relatively few imports from Canada and Mexico over 1994–2016,” he wrote. “First, there was a general decline in U.S. AD/CVD use against imports from all (non-Chinese) foreign sources. A second factor is the deepening economic integration in North America under NAFTA. The groups that typically request that the U.S. government impose new trade barriers under these laws have increasingly cross-border common firm ownership (including in steel) and common labor union representation of workers; this especially discourages U.S. use against imports from Canada.
   “Nevertheless, the legal disincentives provided by NAFTA Chapter 19…likely contributed to the relatively low levels of U.S. use of such laws against imports from Canada and Mexico.”

The legal disincentives provided by NAFTA Chapter 19…likely contributed to the relatively low levels of U.S. use of such laws against imports from Canada and Mexico.

   One issue that’s unclear from the administration’s list is whether a wholesale revision of rules of origin is a priority. There’s no special section in the summary of objectives. Reinsch wondered whether Trump’s team might try to carve out a “made in America” component.
   “That does not rule out demanding a sub-requirement of U.S. content within a larger North American percentage, but neither does it say explicitly that is what they will seek,” he said. “Doing so would be highly disruptive.”
   Indeed, NAFTA proponents point to the idea that North America has become a more effective and cohesive value chain platform over the last two decades. A recent report from the World Trade Organization, synthesized nicely here by the Brookings Institution, opines that trade is moving away from a model of less developed nations providing raw materials and labor to supply finished goods to more developed nations.
   Instead, value chains are evolving so that less developed nations can “slot themselves into a part of the production chain without having to produce a complete, final good,” as David Dollar, Brookings’ senior fellow of foreign policy, global economy and development, put it. “As a result, developing countries now mostly export manufacturing value-added.”
   There’s a question of whether the current administration sees NAFTA and the three members collectively in that way. Judging by its intent focus on bilateral trade deficits and policies to reduce those deficits, probably not.
   NAFTA renegotiation will take time. Talks can begin 30 days after the parties release their objectives. The administration has set an aggressive timeline for negotiating sessions from August through January, but those talks could well drag on past January. In the meantime, we have a more fleshed-out list of what the administration wants to accomplish, even if it lacks granular specificity or any big surprises.