NAFTA

A third lightning round of North American Free Trade Agreement (NAFTA) talks begins in Ottawa on September 23. Negotiators reportedly made progress during the first two go-rounds in Washington and Mexico City, reaching tentative agreements on intellectual property, e-commerce, and environmental protections, likely following the general outlines hammered out within the Transpacific Partnership agreement, or TPP. Yet the thornier issues – investor dispute settlement options, rules of origin, Buy American clauses, and importantly labor rules and wages – remain. And even as trade negotiators met in round-the clock sessions to get these initial breakthroughs, U.S. President Donald Trump revived his public existential threats, saying he will end up “probably terminating NAFTA at some point.” Commerce Secretary Wilbur Ross chimed in that ending the agreement is “the right thing” to do if the United States doesn’t get what it wants by the end of the year. Trump, along with many Americans, condemns NAFTA for taking jobs. The president repeatedly asserts Mexico is “killing us on jobs and trade” and NAFTA is “a one-way highway out of the United States.” Average Americans echo these fears. In 2016 two out of three Americans believed globalization was good for the overall economy and country, but only forty percent thought it created employment and just one in three thought it protected jobs already here. NAFTA is viewed with particular skepticism, with nearly half of Americans believing the United States got a bad deal. The facts belie these perceptions. The non-partisan Congressional Research Service, reviewing dozens of studies conducted over the last twenty years, found that the trade agreement has had little to no effect on net employment in the United States. Yes, jobs were lost, as others were gained, leading to a net wash. And while these transitions are undoubtedly hard for individual workers, NAFTA-inspired job losses (leaving aside the new positions created by more trade) accounted for less than 1 percent of the nearly 18 million positions eliminated every year. These limited effects reflect the fact that even at $1.2 trillion dollars, North American trade represents just 6 percent of the U.S. economy. In the larger worry over jobs, the United States should be commiserating rather than condemning its southern neighbor. A recent International Labour Organization (ILO) report shows that Mexican workers, like their U.S. colleagues, suffered the most from Chinese competition, not each other. Over the last two decades, Mexico lost nearly 650,000 net jobs to the Asian giant, as textiles, shoes, and computer factories shuttered in the face of cheap imports or as management moved operations across the Pacific. The United States, according to estimates by scholars David Autor, David Dorn, and Gordon Hanson, lost 2.4 million jobs to China over a roughly similar period. Per capita this represents 11 of every 1,000 workers in Mexico, and 14 per 1,000 workers in the United States... View full text of article, originally published in Americas Quarterly.

Anupam Chander argues that a renegotiated North American Free Trade Agreement could set the gold standard for digital free trade, an opportunity the Trump administration should not miss.

The first round of NAFTA negotiations now concluded, the three nations will take a two week breather before reconvening in Mexico City on September 1. While the policy differences should be surmountable, in Why NAFTA Needs More Than a Few Tweaks for Fortune, I argue that the biggest threat to NAFTA is Trump. Thinking about the broader U.S.-Mexico relationship in the September/October 2017 issue of Foreign Affairs, The Mexican Standoff: Trump and the Art of the Workaround, I argue that despite the frequent animosity coming from the White House, Mexico has a historic opportunity to ambitiously lead its northern neighbor to a stronger North America. To do so, it needs to draw on the latent support from the farms, companies, and industries, as well as towns, cities, and states that benefit from these now indelible bilateral ties. The other overriding foreign policy challenge in the hemisphere comes from the worsening economic, political, and humanitarian catastrophe in Venezuela. In this piece for CNN, Venezuelan Sanctions Without Diplomacy Will Fail, I argue that unilateral sanctions, much less the military action President Trump has intimated, will be counterproductive to U.S. goals of regime change. Only concerted diplomacy, uniting governments in the region and around the world, can pressure those in Caracas.

Last Thursday, I had the pleasure of joining David Gura and Francine Lacqua on Bloomberg Surveillance to discuss Venezuela and Mexico. You can watch the full show here, with the Venezuela portion from 1:52:30-1:57:00 and Mexico from 1:58:30-2:04:30.

The North American Free Trade Agreement was the first in U.S. history to slash trade barriers between a wealthy country and a much poorer one. This week, the NAFTA will mark another first when officials from Mexico, Canada, and the United States sit down in Washington to begin renegotiating the deal. The two milestones are not unconnected—NAFTA was the most controversial trade deal ever negotiated by the United States, in part because of the incentives it created for companies to relocate to Mexico to take advantage of lower wages. The success or failure of the coming negotiations will largely determine whether U.S. trade policy can find a firmer footing for the future or continue to be handcuffed by a lack of political and popular support. Here’s the challenge in a nutshell: how to take a two-decade old agreement that President Trump has called “the worst trade deal ever negotiated,” and somehow alter it sufficiently that the president becomes its champion if and when it goes to Congress for ratification. Trump has many times called himself a great negotiator, and NAFTA will be the acid test of that boast. Here are the four challenges that must be overcome for a successful NAFTA renegotiation: 1)    Putting America first: Trump’s biggest objection to NAFTA is that it was a one-sided deal, pointing to the large increase in the U.S. trade deficit with Mexico since its enactment and the loss of manufacturing jobs to Mexico. Whether the economic benefits of NAFTA to the United States have outweighed those costs—my colleagues James McBride and Mohammed Aly Sergie have a good backgrounder weighing the arguments—is beside the point. Trump needs to show that he has changed the agreement not just in ways that may benefit all three countries, but in ways that will help the United States relative to Canada and Mexico. That is a much harder task. The “America first” issues in the U.S. negotiating objectives include eliminating the special dispute settlement provisions under Chapter 19 of NAFTA, strengthening “Buy America” and other procurement rules that benefit American companies, and tightening so-called “rules of origin” to encourage sourcing in the United States and North America. Each issue is fraught for different reasons. Canada will fight to its last breath to retain the Chapter 19 rules, which allow it to challenge U.S. antidumping and countervailing duty orders before a NAFTA tribunal rather than in U.S. courts. With the ongoing fight over softwood lumber, and a new case that could block sales of Bombardier aircraft in the United States, the issue is still a vital one for Canada. Both Canada and Mexico will object to restrictions on their access to government procurement in the United States, but may be willing to live with this concession. Rules of origin—which is largely an issue for the automotive industry—is a wild card. If they are renegotiated to require more “North American” content, then Mexico will cheer; indeed, it is the U.S. car companies that would object. But if the Trump administration tries to introduce an “American” content requirement, this would clearly violate the spirit of the deal. Of course, Trump could try out a more traditional “pro-America” argument for trade—that strengthening NAFTA rules for digital commerce, for intellectual property, for labor and environmental standards, would all help U.S. companies and the workers they employ. But since the U.S. negotiating proposals on these issues are borrowed almost entirely from the Trans-Pacific Partnership (TPP) agreement that Trump tore up on his first day in the Oval Office, this seems unlikely. 2)    Dealing without deadlines: All three countries are saying that they want to move quickly on the renegotiation to reduce uncertainty for investors in North America. The coming Mexican election next year, which could bring the populist Andrés Manuel López Obrador to power, is seen as an especially strong motivation to get the deal done early. But modern trade negotiations are difficult and complex. The TPP took nearly a decade to negotiate. The Trans-Atlantic Trade and Investment Partnership (TTIP) with Europe was supposed to be concluded last year and has barely made it past the preliminary issues. Mexico’s economy minister Ildefonso Guajardo said last week he sees a “60 percent chance” of the deal being done by the end of the year, which is another way of saying it likely won’t happen. The bigger problem for Trump is that Mexico and Canada have strong incentives to delay. The longer the talks drag out, the wearier the president is likely to become of the whole exercise, and the more likely he becomes to accept modest changes and try to call it victory. Or, more worrisome, it could force Trump to trigger the NAFTA withdrawal provisions that he came so close to invoking in April, which would be highly disruptive but would have the negotiating advantage of setting a hard, six-month deadline for the talks to succeed or fail. 3)    Holding back the wolves: American business and American farmers really like NAFTA. Except the trucking industry, which wants permission for foreign drivers to “reposition” empty trucks within the United States. And the textile industry, which wants to revisit the “tariff preference levels” agreed to under NAFTA that allow for foreign fabrics to be used in some clothing. And the California wine industry, which objects to the special treatment given to domestic wines in Canadian retail outlets. And the dairy industry, which has long chafed at Canada’s protectionist regime for milk and cheese.  In the testimony in June to the International Trade Commission, U.S. companies that were by and large supportive of NAFTA nonetheless raised dozens of issues they would like to see addressed in the negotiations. But the more issues that are thrown on to the negotiating table, the more difficult it will be to reach a deal in any sort of timely fashion. To get the agreement done, the Trump administration is going to have to get very good at saying no to a host of special interests, each of whom comes armed with influential political allies in Congress. 4)    Dealing with Democrats: Many congressional Democrats, who were frustrated with President Obama’s embrace of the TPP and Hillary Clinton’s lukewarm rejection of the deal, have been chomping at the bit to re-establish themselves as the anti-NAFTA, trade-skeptic party. Senate Democratic leader Charles Schumer (D-NY) earlier this month released the party’s “better deal” agenda, which tries to out-Trump Trump in its criticisms of U.S. trade deals. It can be said with confidence that whatever deal Trump can extract from Canada and Mexico will immediately be denounced as a sell-out and a give-away by the congressional Democrats. That will put the president is a position he would surely prefer to avoid—arguing the merits of NAFTA against vociferous opposition from Democrats, and needing pro-trade Republicans like Speaker Paul Ryan (R-WI) and House Ways and Means Committee Chairman Kevin Brady (R-TX) to carry the load for him in Congress. NAFTA was the beginning of an era, the first great experiment in freeing trade between high wage and low-wage countries. It set the basic template for many deals that followed, including the CAFTA with Central America and the Dominican Republic, and China’s entry into the World Trade Organization. None of those deals has become more popular with age. A successful renegotiation of NAFTA would be another milestone, demonstrating such deals can be living agreements that can be updated, improved, and continue to work in the interests of both wealthier and poorer countries. A failure, however, would continue to erode the already fading public confidence in trade.

Ford announced this week that instead of building its new Focus – the best-selling car in the world – in a new $1.6 billion dollar Mexico-based plant, it will ship cars for North American customers from China. Ford has promised that its decision won’t reduce its workforce. Yet even if that is true, American workers will lose. Today the compact Focus uses steel from Wisconsin, axles from Oregon, seatbelts from Indiana, grills from Michigan, tire pressure sensors from Tennessee, front-side shafts from North Carolina and Ohio, and the list goes on. With the shift, these raw materials, parts and components will be sourced and put together in Asia, eliminating dozens of U.S. based suppliers, and likely costing many of their employees their jobs. While assembly was scheduled to move from Michigan to Mexico, that would have ensured ongoing American employment – as over 40 percent of the value of vehicles “made in Mexico” comes from U.S. factory floors and U.S. offices. For products imported from China – as the new Ford Focus will be starting in 2019 – this number is a negligible 4 percent. Ford made the decision first and foremost for market reasons. China’s 28 million vehicle market is the largest in the world. And while U.S. demand for smaller cars has faltered, in China it is growing at a robust 4 percent annually. Already nearly half of the million Ford Focus models sold each year go to Chinese buyers. Importing vehicles isn’t an option as the United States doesn’t have a free trade agreement with China, so cars coming from abroad face a stifling 25 percent tariff. View full text of article, originally published in Americas Quarterly.

While tweets and speeches may continue to cause consternation in Mexico and Canada, the existential threat to NAFTA seems to have passed. President Donald Trump is now talking about giving “renegotiation a good, strong shot” rather than rescinding the free trade agreement entirely. On the docket will be intellectual property, labor rights, e-commerce, rules of origin and the environment – issues Canada and Mexico are happy to upgrade, the outlines already defined within the ill-fated Trans-Pacific Partnership. More contentious issues could include “Buy American” clauses, border customs processes, sanitary measures, and import licenses, as well as specific grievances around the Canadian dairy and soft lumber industries, and regarding Mexican sugar imports. The process will undoubtedly be drawn out; the negotiations won’t begin in earnest until three months after the White House informs a still-waiting Congress. But for Mexico, there is another huge challenge to its economic future: U.S. tax reform. The most obvious and widely noticed threat is a border adjustment tax (BAT). As laid out in Speaker Paul Ryan’s tax reform “blueprint,” it would charge a 20 percent levy on all goods and services brought into the United States, and exempt U.S.-made exports from being taxed at all. Its proponents claim the dollar would appreciate the 25 percent necessary to call it an economic wash; others believe Mexico and other exporting nations would suffer. This pseudo-value added tax (VAT) is looking less and less likely, as it is opposed by Wal-Mart, Target and nearly every other major retailer, as well as by oil companies, car makers and others that depend on products from elsewhere to run their factories and businesses here. Even if it passes, it will face legal challenges in the World Trade Organization (WTO) for its non-VAT qualities, in particular allowing companies to deduct wages when calculating their BAT tax burden. A corporate tax cut is more likely to succeed, and could be as damaging for Mexico. Republicans across the board have long favored a reduction, and with the U.S.' current 35 percent tax rate ranking highest among OECD nations, they have an argument for it. Ryan talks of lowering the corporate rate to 20 percent, bringing the United States in line with the United Kingdom and Luxemburg. Trump’s more drastic 15 percent proposal would put the United States in the bottom 20 percent of chargers, beating out Germany and closing in on the “corporate tax haven” of Ireland. If the U.S. rate plummets, Mexico will be forced to follow suit. View full text of article, originally published in Americas Quarterly.

Much is made of the perils of ending NAFTA for Mexico, and rightly so. The 23-year-old agreement has helped the nation not only boost trade but also transform its economy, moving from a commodity to an advanced manufacturing exporter. With 80 percent of its exports headed north, even the threat of change has hurt Mexico’s currency, limited its ability to attract foreign direct investment, and cut the country’s current and future economic growth. Largely overshadowed in all the tough renegotiation talk is what might happen to the U.S. companies that sell into Mexico’s $1 trillion dollar economy and to its 120 million consumers. With NAFTA’s zero tariffs and legal guarantees, the U.S.’ southern neighbor has become a top export market, buying over 15 percent of everything made in America and then sold abroad, topping $230 billion in 2016. Best known and most tweeted about are the industrial behemoths – Caterpillar, Ford, General Motors, and Medtronic – as a part of their tens of billions of dollars in market capitalization are backed by sales of machines, cars and medical equipment to Mexico. More vulnerable are thousands of small and medium-sized American businesses, which are more likely to export to Mexico than anywhere else in the world. All told, these companies big and small employ some 5 million Americans, and help support hundreds of communities across dozens of states. This could all change if NAFTA ends. Tariffs on U.S. exports would rise to an average 7 percent; on some crops and apparel fees would jump to double digits. These new charges would make corn, soy, beef, or pork from far away Argentina and Brazil more economically, not to mention politically, attractive. The tariffs would also enable EU made helicopters, generators, engines and other car parts to edge out American producers, gaining market share. All told, U.S. companies would be at a disadvantage vis-à-vis the past and vis-à-vis the 45 other nations that have free trade agreements with Mexico, and the end of NAFTA would level the playing field for those still without a preferred arrangement. By far the biggest winner will be China. Even with tariffs, Chinese goods already flood the Mexican market, selling billions in cellphones, computers, TV parts, and innumerable tchotchkes. The Asian giant has been stealing market share from U.S. makers since they entered the WTO in 2001, cutting U.S. sales to Mexico from 4 out of every 5 dollars of imports to less than 1 in 2. View full text of article, originally published in Americas Quarterly