[CTC] Trump's first big trade challenge: Renegotiating NAFTA

[Arthur Stamoulis]

Politico Pro
 
Trump's first big trade challenge: Renegotiating NAFTA
 
By DOUG PALMER 12/27/16 
 
President-elect Donald Trump has one easy trade task on his first day in office and one hard one that has the business community’s stomach in knots.
 
The easy one is withdrawing from the TPP. It might damage relations with Japan and 10 other countries that spent years negotiating the deal with the United States, but it's not yet in force, so all Trump has to do is say “bye bye” to the pact.
 
 
The hard one: Beginning talks on renegotiating NAFTA, a pact that has had nearly 25 years to spread its entrails throughout Canada, Mexico and the United States.
 
Dramatically changing the agreement could send tremors throughout the North American business community, which has invested billions of dollars in developing cross-border supply chains over the last quarter century.
 
“There could be some tectonic shifts,” said Dan Ikenson, director of the trade policy center at the free-market Cato Institute. “The slightest hint that things are going to be disrupted could cause capital flight from the U.S.”
 
The president-elect has been nothing but contemptuous of the agreement, which was forged by an earlier generation of Republican leaders, including President George H.W. Bush, Secretary of State James Baker and U.S. Trade Representative Carla Hills, before being signed into law by President Bill Clinton in 1994.
 
But so far he’s offered few details about what changes he’d like to make to the agreement, which he has threatened to withdraw from if Mexico and Canada don’t agree to new terms. That vague position gives him lots of leeway to make changes to “fix” the pact without uprooting business relationships developed over the last quarter century, analysts said.
 
In an ironic twist, many business groups hope Trump will steal ideas from the TPP agreement as he seeks to upgrade NAFTA. That should be possible since both Canada and Mexico are part of the 12-nation deal.
 
“I think Trump feels obligated to revisit it without knowing what he wants other than keeping U.S. companies in the United States instead of going to Mexico,” Ikenson said.
 
But persuading Canada and Mexico to agree to a deal that would make companies less likely to locate production in those countries than in the United States would be difficult, said Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics.
 
“I suspect each country will have different priorities and the objectives may be inconsistent,” Schott said. “And I can imagine [the negotiations] will not be successful because the objectives will be inconsistent.”
 
“In any event, finding a package that will be reciprocal will require a lot a work,” Schott added. “Until there’s a clearer idea of the objectives of all three countries, you don’t know whether that scheme will be workable or not.”
 
Few business groups are clamoring for a renegotiation, and many appear more worried about Trump following through on his threat to withdraw from the pact.
 
“You want to get rid of NAFTA?,” U.S. Chamber of Commerce Tom Donohue asked in an interview with Fox News earlier this year. “NAFTA is 14 million jobs in the United States.”
 
Meanwhile, the National Association of Manufacturers makes no mention of a NAFTA renegotiation in its “Competing to Win” recommendations for Trump and the incoming Congress.
 
Instead, the group is calling for implementation of the TPP agreement and the pursuit of other trade deals, including the Transatlantic Trade and Investment Partnership with the European Union, which faces an uncertain fate under the new administration.
 
Linda Dempsey, the group's vice president of international economic affairs, told POLITICO that NAFTA has been a boost to U.S. manufacturing competitiveness, "and we look forward to working with government officials — the incoming administration, leaders in Mexico and Canada — on possible improvements to reduce barriers and improve U.S. manufacturing competitiveness given the agreement is now over 20 years old. At the same time, it is critical not to put at risk the 2 million U.S. manufacturing workers whose jobs rely on U.S. exports to Canada and Mexico.”
 
The American Farm Bureau Federation is similarly disinclined to upset the apple cart when it comes to NAFTA and other trade pacts.
 
“Agricultural exports to countries where we have trade deals have increased more than 136 percent since 2003,” Zippy Duvall, the group’s president, said in a weekly message to the farm community ahead of the presidential vote. “In the 20 years since signing the North American Free Trade Agreement, total U.S. exports to Canada and Mexico have quadrupled.”
 
Still, even fans of the agreement say there is plenty of room to improve the pact without disrupting long-standing business relations.
 
“If you look at NAFTA, there’s an energy chapter, but there’s nothing there,” said Grant Aldonas, a former undersecretary of Commerce for international trade. “This is a real opportunity to do real liberalization if you decided you want to approach NAFTA the way that you should, which is the ground rules are pretty good, but there’s a lot more we can do.”
 
The Trump administration could even try to tackle immigration reform in the context of a NAFTA renegotiation by developing a way for Mexicans to work in the United States along the lines of the “bracero” program, a guest-worker program that existed from 1942 to 1964, Aldonas said.
 
Last week, the largest U.S. labor group beat business groups to the punch by releasing its blueprint for a renegotiation of NAFTA.
 
The AFL-CIO called for changes in six key areas, including eliminating NAFTA's investor-state dispute settlement mechanism, which allows private companies to sue for damages over laws and regulations that have a negative effect on profits or business operations. It also calls for scrapping side deals on labor and the environment and replacing them with enforceable rules that are part of the body of the agreement.
 
In two other key areas, the labor group also calls for the creation of binding rules to prevent currency manipulation and for an upgrade to NAFTA's rules of origin on automobiles and auto parts.
 
The 62.5 percent "made in North America" threshold for most autos to qualify for duty-free treatment "still allows for nearly 40 percent of a car to be made in China, Thailand or elsewhere," the group says. The automobile parts rule could also be upgraded to eliminate loopholes and create incentives for North American production.
 
Another recommendation seeks the wholesale deletion of NAFTA's procurement chapter, which treats Canadian and Mexican goods as American for government purchasing decisions that require the use of U.S.-made materials.
 
The final proposed change would upgrade the agreement's trade enforcement chapter to amend a provision that allows a binational panel instead of a "competent domestic court" to give a final review of decisions on domestic trade remedy cases.
 
So far, no business group has come forward with a detailed list of recommendations for how Trump should revise the NAFTA pact. But Rufus Yerxa, president of the National Foreign Trade Council, says his organization favors incorporating provisions of the TPP agreement, especially in such areas as digital trade, regulatory reform and state-owned enterprises, into trade deals “with as many countries as we can get them with.”
 
“I would rate those all as very, very important for our members,” Yerxa said.

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