Commentary

Why NAFTA Needs More Than a Few Tweaks

Aug 16, 2017

U.S., Mexican, and Canadian trade negotiators meet this week in Washington DC for the first of seven lightning rounds to reshape what Trump calls the “the worst trade deal” ever signed, the North American Free Trade Agreement, or NAFTA.

Twenty-three years on, NAFTA needs an upgrade. E-commerce and digital rights are missing. Intellectual property rules have evolved since the signing. Labor rights and environmental standards, included the first time around in side agreements, can and should be strengthened. On these issues the three countries generally agree, and for most of them they already have hammered out language through the Trans-Pacific Partnership, or TPP.

There are areas of discord. The Trump administration has suggested doing away with Chapter 19, which created binational panels to resolve commercial disagreements. Mexico and Canada in particular are unlikely to let this dispute mechanism go, as it has limited the use of antidumping and countervailing tariffs between the nations.

The U.S. is also demanding unspecified actions to reduce its trade deficit; neither of America’s partners are likely to welcome introducing new tariffs or quotas. Still, if given space, the professional negotiators on all three sides should be able to overcome their differences.

More likely to throw the negotiations into disarray is the U.S. president himself. While silent on NAFTA since spring, recently leaked transcripts of President Donald Trump’s initial call with Mexican President Enrique Peña Nieto reveal the real dangers for the free trade agreement’s future.

Talking for just shy of an hour, Trump’s banter shows how little he knows and cares about the domestic politics and constraints other leaders face. Throughout the call he returns to the issue of the border wall, pressuring Peña Nieto to publicly acquiesce to some sort of payment even as he admits that Mexico will not, in the end, fund his campaign promise. Even a cursory read of Mexican politics shows that the wall is a touchstone issue for a president whose approval ratings hover in the low double digits; no Mexican politician could agree to “working it out” as Trump demands. NAFTA renegotiations too will have their domestic redlines; the trade negotiators will see these, but Trump may not.

Worse, the call reveals how little Trump comprehends what strengthens America in the global economy. His repeated assertion that he will just “put a border tax on” makes no sense in today's world of North American assembly lines.

In large part because of NAFTA, Mexican and Canadian factories are more partial to U.S. suppliers than any others in the world: Of Mexico’s exports to the United States, 40% of the value is made in America; for Canada, it is 25%. In contrast, U.S. factories barely provide 5% of the inputs into products made in the rest of the world. These regional supply chains that power America’s car sector, aerospace industry, and numerous other advanced manufacturing facilities support 14 million U.S. jobs, many of them the higher-paying ones Trump repeatedly promises to bring back. Failed NAFTA negotiations would put many of these in jeopardy.

Even before starting, the U.S. and Mexico are broadcasting that they will finish the rework by the end of the year, in line with their own domestic electoral calendars. This speed suggests changes to NAFTA will be minimal—enough to get a new deal and move on.

But having reopened NAFTA, the three nations should move beyond tinkering or recycling TPP clauses to focus on truly making North America more competitive. This will require joint infrastructure, customs, regulations, and other streamlining to make its shared borders more seamless. It means connecting North America’s energy networks through pipelines, grids, and regulatory frameworks to bolster the region’s self-sufficiency, resilience, and overall economic advantage. And it means replacing talk of a wall with joint efforts against the common threats of drug trafficking, transnational crime, terrorism, natural disasters, and cyber hacks. Finally, it means recognizing that the freer movement of people strengthens families, communities, and economies increasingly dependent on North American production.

A successful outcome will deepen the three nations’ ties, recognizing and reaffirming North America’s role in the current and future prosperity of all of them. Failure will diminish the region’s promise, and more companies will move to Europe or Asia, as the Ford Focus has just done, leaving U.S. suppliers bereft.

Revamping NAFTA is likely the most important thing three countries will do together this decade. They should take their time, and get it right.

Shannon K. O’Neil is the Nelson and David Rockefeller senior fellow for Latin America at the Council on Foreign Relations.

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