Representatives from Canada, Mexico, and the United States meet today in Washington, DC to renegotiate the 23-year-old North American Free Trade Agreement. Early reporting by NPR indicates that negotiations were off to a rocky start. As the three nations’ representatives get started, the future of NAFTA remains unclear.
History of NAFTA
The North American Free Trade Agreement was the successor to the Canada-United States Free Trade Agreement, which was signed by President Reagan and Prime Minister Mulroney in 1988. NAFTA was negotiated during the Bush administration and signed into law by President Clinton. When it went into effect on January 1, 1994, NAFTA was the largest free trade zone in the world.
Economic change creates winners and losers as old jobs and businesses are destroyed and new ones created. Criticisms of the free trade agreement began during its negotiation and have continued ever since.
In the United States, NAFTA accelerated the outsourcing of manufacturing jobs to Mexico that had begun decades before by the Maquiladora program.
For Mexico, these manufacturing jobs are a boom for the economy, providing steady employment and in many cases a pathway to the growing middle class. The automotive industry, so critical to the manufacturing boom after World War II in the United States, now provides nearly a million manufacturing jobs in Mexico.
In Mexico, NAFTA opened the door to cheap agricultural goods from the United States. Arguably the most harmful agricultural import for Mexican producers was corn. Corn farmers in the United States were able to out compete their counter parts in Mexico due to greater technology, highly productive land, and significant government support. Corn imports from the United States remain a contentious topic in Mexican politics. Since the election of Donald Trump, Mexico has turned its sights south to Brazil and Argentina as possible alternative suppliers.
NAFTA had a much more muted effect on Canada since it already had a free trade agreement with the United States. Trade between Mexico and the US was nearly eight times higher in 2016 than it was in 1994, $31 billion compared to $4 billion. However, the nominal value is dwarfed by Canada’s trade with the US, which more than doubled from $236 billion in 1994 to $507 billion in 2016.
Overall, the North American Free Trade Agreement has been beneficial for Canada, Mexico, and the United States. Supply chains cross borders as businesses seek the most efficient means to produce goods, linking millions of workers in North America, and lowering the cost of goods for consumers. The rules of origin requirement in Chapter 4 of NAFTA further strengthens economic integration between the three nations.
The dissatisfaction with NAFTA, particularly related to the US’s trade deficit with Mexico and the loss of manufacturing jobs, that President Trump expressed on the campaign trail and since he took office has brought representatives of the three nations together to try to renegotiate the treaty. Based on prior reporting and statements made by the leaders of Canada, Mexico, and the United States, each country’s goals for renegotiation can be discerned.
One of Canada’s main goals is to retain the trade dispute mechanisms in Chapter 19 of NAFTA. Chapter 19 provides for a binational panel to make decisions on anti-dumping and countervailing duties, thereby bypassing the judicial system.
A recent article in Macleans, a Canadian news magazine, explains why retaining Chapter 19 is so important to Canada:
If Chapter 19 were removed from NAFTA, then the Trump administration could more easily impose unwarranted antidumping and countervailing duties on all sorts of goods imported from Canada and Mexico for years and years until the dispute is ultimately settled by the U.S. court system.
Prime Minister Justin Trudeau appears to have drawn a line in the sand on this issue. On July 25, Trudeau told reporters:
A fair dispute-resolution system is essential for any trade deal that Canada signs on to.
The future of a trade dispute mechanism in NAFTA will undoubtedly be a point of contention since one of the stated goals of the Trump administration is to eliminate Chapter 19 entirely.
The Mexican government has not been as forthcoming with their goals for renegotiation as their counterparts in Canada and the US. However, it seems that President Enrique Peña Nieto’s goals for renegotiation are a continuation of the status quo and to finish the process before the end of the year. That is because Mexico holds a presidential election in July 2018. President Peña Nieto has incredibly low approval ratings, and his unpopularity may cost his party the presidency next year. The President’s term in office ends December 2018, and it is likely that the renegotiation process will be over well before then.
The United States
Donald Trump has been overtly hostile towards NAFTA both as a candidate and as President.
I will renegotiate NAFTA. If I can’t make a great deal, we’re going to tear it up. We’re going to get this economy running again. #Debate
— Donald J. Trump (@realDonaldTrump) October 20, 2016
In a recent press release, United States Trade Representative Robert Lighthizer laid out the grievances and goals of the United States:
Too many Americans have been hurt by closed factories, exported jobs, and broken political promises. Under President Trump’s leadership, USTR will negotiate a fair deal. We will seek to address America’s persistent trade imbalances, break down trade barriers, and give Americans new opportunities to grow their exports. President Trump is reclaiming American prosperity and making our country great again.
It seems that the administration believes that a “fair deal” will be one which allows the United States to take measures to close the trade deficits it has with Canada and Mexico. Two changes to NAFTA that the administration has proposed are to strengthen the rules of origin requirement and to eliminate the Chapter 19 trade dispute mechanism.
Both Mexico and Canada will push back hard if the United States suggests either of those changes.
NAFTA created a massive boost in trade and economic interconnectedness between Canada, Mexico, and the United States. For years, the benefits of an economically closer North America were not significantly questioned by policy makers, although politicians in all three countries complained about the growing pains associated with economic change.
Moving forward, there are several changes to NAFTA that would build upon the original spirit of the treaty and further benefit all three countries. Beneficial changes would include updating policies to improve environmental and labor protections and to allow for greater movement of labor between the three countries. However, unless President Trump makes a complete about-face on his previous statements, it is unlikely that either of these changes will be made.
President Donald Trump’s “America First” belief system is in direct confrontation with the principles of globalization and economic liberalism that are on display in the North American Free Trade Agreement. The trade representatives in Washington, DC may find it impossible to reconcile these difference. Should that come to pass, President Trump may add NAFTA to the growing list of international agreements that the United States has abandoned.
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