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"NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country," declared candidate Donald Trump during a September debate with Hillary Clinton. On the campaign trail, Trump vowed to drastically change the 23-year-old free trade pact to make it a winning deal for the US — and threatened to scrap the deal altogether if he didn’t get what he wanted.
But a draft proposal from the Trump administration that’s been circulating in Congress recently doesn’t appear to push for a radical transformation of NAFTA, or portend its destruction. In fact, it actually sounds ... constructive.
The draft proposal sounds strikingly sunny about the importance of free trade with the US’s NAFTA trading partners, Canada and Mexico, acknowledging their “shared interests” and “common values.” It contains plenty of fairly conventional language on market access and reducing trade barriers that accompany typical letters of this kind. And while there are a number of provisions that Canada and Mexico are likely to object to, there’s a noticeable absence of the kinds of protectionist proposals that would have guaranteed the accord went down in flames.
“[These positions] could be the beginning of a negotiation that Canada and Mexico would be willing to participate in,” Chris Wilson, deputy director of the Mexico Institute at the Wilson Center, told me. “It definitely signaled the US goal would be to update NAFTA and improve it — not to blow up NAFTA.”
There are limitations on how much we can read into the proposal. Much of the language is ambiguous and prone to diverging interpretations. And the letter is a draft, so it doesn’t reflect the administration’s final stance and could potentially change substantially before it is made official and sent to Congress as a letter of intent to renegotiate the pact.
Right now the Trump administration is still discussing the proposal with lawmakers focused on trade in the House of Representatives and the Senate to refine negotiation priorities. The White House and Congress need to find common ground before negotiations begin and for changes to have any chance of being approved by Congress.
But from what we can tell so far, the document appears to be a compromise rather than the war cry that Trump promised as a candidate. There are some proposals that, depending on how they look when they’re expanded on with more detail, could cause some tense negotiations. But there are also plenty of modest measures that all three countries are likely to be able to have fruitful discussions on. And in an ironic twist, some of the most important ones hail from proposals negotiated under a trade treaty in the Obama era that Trump blew up during his first week in office.
The White House looks like it wants to build constructively on NAFTA as it exists
As Wilson notes, the proposal makes the case for the importance of trade between the US, Canada, and Mexico. It acknowledges that Canada and Mexico are indispensable export markets for the US, as well as vital sources of imports. It doesn’t threaten withdrawal from their deeply interconnected web of trade routes. Instead, it argues that the agreement needs to be updated in order to better handle the nature of trade in the modern economy.
The Trump administration’s major concern is the trade deficit the US has with Canada and Mexico — the fact that the US imports more from Canada and Mexico than Mexico and Canada import from the US. The US-Canadian goods trade deficit was only about $15 billion in 2015, but the one between the US and Mexico was a much bigger $50 billion that same year. The main dynamic underlying that trade deficit that Trump is concerned with — and the one that helped him seize the White House — is the migration of hundreds of thousands of US manufacturing jobs to Mexico.
A number of the Trump administration’s proposals aimed at making the deal more friendly to US workers are likely to be uncontroversial.
For instance, there’s discussion of the need to update NAFTA in order to develop rules regarding e-commerce, digital sales, and data housing requirements — basically ensuring that there are new regulations specific to the information economy, which has blossomed since the accord was first negotiated decades ago. Canada and Mexico are on board with having those discussions.
There are also proposals to make labor and environmental regulations stricter, which would mainly affect on Mexico. The idea is that by demanding more stringent standards and enforcement of standards regarding issues like minimum wages, union organizing rights, workplace safety, and environmental impact, the cost of doing business in Mexico will go up, blunting some of the edge that lower-paid Mexican workers have over more expensive US workers.
Mexico and Canada are likely to sign off on proposed labor and environmental standards because they already have in the past — under negotiations for the Trans-Pacific Partnership. The Obama administration successfully got them on board with these rules while hammering out that accord, which Trump pulled out of during his first full working day in office. As such, they’re likely to accept them again. Currently, there are some labor and environmental regulations in NAFTA, but they’re part of a side deal and can’t be enforced the way they would if they became part of the contract itself.
There are some big contentious issues that could arise
There are a number of issues that could potentially become major negotiating obstacles, or ultimately change NAFTA rather significantly.
The biggest one is probably the call for allowing a country to use tariffs as a safeguard if a set of imports causes “serious injury or threat of serious injury” to a domestic industry (these are known as “snapback tariffs”). Under NAFTA, the norm is zero tariffs on goods crossing borders; this would create temporary exceptions to preserve industries particularly hard hit by competition. It would allow the US to say that, for example, a certain Mexican auto part deserves to be taxed at the border because it is killing the US industry that makes comparable auto parts.
Wilson says snapback tariffs exist under some World Trade Organization measures, but they’re typically accompanied by a provision that allows the country being hit by them to impose some of its own in order to disincentivize their abuse. It’s basically an additional safety measure to ensure that the original safety measure isn’t used inappropriately. Mexico and Canada, if they don’t reject the proposal out of hand, could push for that kind of add-on. Wilson says they’d also want assurances that this is an emergency provision and not going to give countries “arbitrary authority” in protecting domestic industries. The devil will be in the details — much of the power of trade agreements lies in extremely nuanced legal details.
Government procurement could be another big issue. Under NAFTA, when the US government is overseeing domestic projects like infrastructure, it’s required to consider Canadian and Mexican companies alongside US bidders. But the proposal’s language suggests the administration could push for rules that allow US companies to have a competitive advantage over NAFTA partners’ companies. That’s probably not going to go down so well during talks.
“I do not think Canada and Mexico would agree to the changes to government procurement, which presume ‘Buy America,’” Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, told me.
Another major issue is changing the rules of origin, or the percentage of a finished product that must be made in North America in order to be considered eligible for the NAFTA free trade treatment.
Currently under NAFTA, a car, for example, has to have 62.5 percent of its parts made somewhere in North America in order to not face tariffs while moving across borders. The rest of the product could be made using parts from, say, China.
One option on the negotiating table would be to raise that standard to boost regional manufacturing. If that threshold were raised to 80 percent, say, it would mean that 80 percent of the car’s parts would have to be from North America and a maximum of 20 percent could come from outside the free trade bloc. Such a proposal would boost the likelihood of production in all three countries — and thus seems like something they could all agree on.
The only problem is that the Trump draft proposal says rules of origin should ensure that NAFTA “supports production and jobs in the United States.” That language is pretty vague, and it could mean that the Trump administration wants to change the rules of origin to focus on domestic production instead of regional production. If that’s the case, it may be a nonstarter.
There are some other issues, too, whose course is hard to predict. The US calls for the removal of one of three major dispute settlement processes under NAFTA, known as Chapter 19, which allows for the creation of international tribunals to help sort out disagreements over measures designed to penalize trade cheating. But it doesn’t call for the elimination of the most controversial one — the investor-state dispute settlement system that allows investors to sue governments in private trade tribunals and basically gives corporations the status of countries under international law.
The Trump administration’s position could change on any number of these issues — we’re going to have to keep watching its evolution and see what’s decided on in the formal letter of notification, and the details that continue to emerge as the actual negotiation date approaches. For now, though, Trump’s sketches of NAFTA’s future suggest a greater likelihood of reform than revolution.
