Talking Trade blog
The five lessons of NAFTA negotiations
Published 03 October 2018
In addition to understanding what a revised North American Free Trade Agreement (NAFTA) means for Canada, Mexico and the United States, everyone seems to want to know what are the implications of NAFTA 2.0 for everyone else. After all, if this is “the greatest deal ever,” according to US President Donald Trump, what does it say for future trade partners?
1. The first lesson seems to be that US arm-twisting works.
Canada was clearly reluctant to sign off on the revised NAFTA agreement. The specific issues holding up closure were dairy market access and something specific to NAFTA called “Chapter 19” dispute settlement for trade remedies. But a look at the whole document suggests that Canada’s issues with USMCA must have run deeper than simply these two points.
For example, Canada (and Mexico) will have to live with a much more complicated set of rules for automotive production than ever before (see our parallel Talking Trade post here). Given the importance of this sector to Canada and to NAFTA markets, this is deeply problematic.
Canada and Mexico appear to have escaped—for now—renewed US pressure as a result of possible Section 232 tariffs on autos for national security reasons. But in doing so, they have also locked themselves into a new round of voluntary export restraints (VERs). While the quotas in place in NAFTA 2.0 are considerably higher than current levels, the principle of setting up these tools—last used with enthusiasm in the 1980s by the Americans with the Japanese auto producers—cannot have been met with happiness in Ottawa or Mexico City.
Canada is the largest supplier of steel into the United States. The revised NAFTA contains a host of new rules for this sector while not removing Canada from existing US Section 232 steel and aluminum tariffs. (The same holds for Mexico.)
2. The second lesson is that in bilateral settings (or smaller groupings like NAFTA), the US gets more of what it wants.
This is, of course, the primary reason why Trump dislikes multilateral agreements in the first place. As the largest, most powerful country at the table, the US gets much more of what it wants in negotiations with the smallest number of counterparts. Some of the proposals from the Trans-Pacific Partnership (TPP) that did not survive are now inside NAFTA 2.0. The clearest example is patent protections on biologic drugs (Article 20:F 14) which is now extended to 10 years. This was set at 8 inside the TPP and ultimately suspended entirely (for now) in the CPTPP.
Similar US proposals from the TPP that were rejected can be found inside the new NAFTA agreement. Some of this makes sense, since the gaps between regulatory systems, as an example, between the US, Canada and even Mexico can be smaller after decades of greater integration than those in a 12 party grouping. But some of the new provisions in NAFTA are positions the US was unable to get through against collective TPP opposition.
3. The third lesson is that the details matter.
Some of the provisions that are currently being ignored by commenters on NAFTA are buried deep in the texts and schedules. These may turn out to be deeply consequential for NAFTA parties.
Some may also affect outside parties. As an example, the auto rules of origin require a significant and growing share of autos, trucks, parts, components, steel and aluminum to be made within NAFTA (with more expensive labor inputs as well). For suppliers based outside of NAFTA, this is going to be extremely problematic or even catastrophic. These orders could be cancelled outright and never replaced.
Alternatively, NAFTA 2.0 could force a renewed look at offshoring or sourcing entirely for export. Either way, existing supply chains are likely to be under severe stress.
4. The fourth lesson is that NAFTA contains some problematic provisions that might spread elsewhere.
For other countries contemplating deals that involve the US in the future, some challenges include the inclusion of something called the Labor Value Content (LVC) in Article 4:B7. (See the parallel Talking Trade for more details.) This whole idea was added to make a vote on NAFTA more palatable for Democrats in the US Congress.
But as a concept, LVC is a terrible idea. It will be impossible to implement and enforce. The compliance burden for firms just escalated exponentially. Customs officials will be hamstrung to sort out what this would mean in products at the border. (And, in NAFTA, under self-certification, surely many companies will simply “declare” these requirements met.)
Free and fair trade is not helped by insisting on labor values in foreign trade partners. It may sound like an attractive way to solve problems of inequality, but the actual result is a distortion in markets. Companies will likely move to places that do not include LVC calculations into key products or will opt to pay the duty rates instead of claiming preferential tariffs and avoid the whole mess.
Another problematic idea is the addition of a currency chapter. A trade agreement is a tool for helping set trade policy. It is not a magic wand to solve all problems and cannot be used to address issues better suited to other venues. Currency may have trade implications, but a trade agreement is the wrong format for tackling these problems. Even the NAFTA parties appeared to realize this, as much of the chapter actually refers to IMF principles.
5. The fifth lesson is that China needs to be ready.
While there are mixed views on this, now that NAFTA is sorted, the US has more time to focus on China. In particular, USTR Robert Lighthizer has more ability to direct his attention to issues with US trade policy towards China.
Lighthizer does not just want to tackle trade deficits. He has a much deeper, broader and more complicated agenda in mind. This will be harder to accomplish. Lighthizer has watched as the playbook from the 1980s with Japan (which he helped write) has largely yielded results—the use of tools like Section 301, more enforcement of trade remedies, self-initiation of cases, tougher pushback on the WTO as an organization and so forth. He seems to think the same will apply to China.
A clear signal of the escalation of the trade conflict for China is even embedded inside NAFTA with the inclusion of 32.10 that allows any NAFTA party (read the United States) to get out of NAFTA if any other NAFTA party (read Canada) tries to negotiate an FTA with a non-market economy (read China).
In all, the closure of negotiations on NAFTA is certainly better for the global economy then watching it blow up entirely. This is, of course, a low bar for determining success. But there are some lessons that extend beyond NAFTA parties that are worth watching.
Trade policy continues to remain interesting. Firms need to start reviewing NAFTA 2.0 now for implications for your company.
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