Trump's outlook on trade policy (among many other things) has been a chaotic work-in-progress. The President is rightly concerned about trade deficits, but has wrongly identified both the causes of those deficits and the means to fix them (Hint: the problem is rooted in macro economics and trade policy won't fix it). With Trump at the helm, predicting what the U.S. position on NAFTA 2.0 may end up being as exact a science as predicting lightning strikes. Indeed, since Trump was reportedly persuaded by his more adult-leaning advisors to seek a "renegotiation" with Canada and Mexico rather than outright withdraw from the NAFTA, it has occurred to me that the "renegotiation" is really a charade. When the bargaining gets tough, a frustrated Trump, looking for deliverables-- even if doing so hurts many of the voters who elected him-- will do as he did with the TPP and withdraw as he promised on the campaign trail.
If stopping short of exploding the NAFTA becomes a reality, there are already several places to begin looking for clues as to what Trump may want from NAFTA 2.0."We will end NAFTA forever" if we dont get "total renegotiation", says Trump in pretaped weekly address before he left for #G20 pic.twitter.com/P0AxSY8x4O— José Díaz-Briseño (@diazbriseno) July 7, 2017
Deepening is (way) Off the Table
Given the politics of contemporary trade politics, there is one thing I would bet the farm on where "modernization" of the NAFTA is concerned; we are NOT headed toward anything resembling a customs or monetary union. If you had asked most economists 10 or 15 years ago what "next steps" were with respect to the NAFTA, they would have pointed toward some form of deepening. The NAFTA left a lot of unfinished business on the table in 1994. While the NAFTA generated a grab back of critics-- many of whom didn't always appear to have understood the NAFTA's real limitations-- the ensuing years also generated a lot of thoughtful analysis about how the NAFTA could be improved and built upon to improve living standards throughout North America. There was a brief period after 9/11 when security brought a renewed intellectual focus to these issues (perimeter strategies, etc), nothing really came of it. I've vented about these things elsewhere, so I won't dwell here.
There are lots of great ideas out there about how best to re-negotiate the NAFTA, many operating within the practical confines of contemporary trade politics; reforming inefficient rules of origin, perhaps dealing with currency valuations, or state owned enterprises.
Sadly, I'm setting a low bar and am hoping to preserve the semblance of trilateralism. Genuine deepening is out.
Public Hearings
On June 27-29, the United States Trade Representative (USTR) held three days of marathon public hearings about U.S. priorities heading into August's expected launch of negotiations. Dozens and dozens of stakeholder groups were each given 5 minutes over those three days to present their priorities. If you are so-inclined, all 11 hearing videos are linked here. Needless to say, they collectively represent a dogs breakfast of interests, many of which are antithetical to one another. The usual suspects of trade policy-making made statements and submitted longer remarks "for the record;" manufacturers, consumers, importers, exporters, labour organizations, environmental groups, even those for whom NAFTA 2.0 presented no immediate problems but who were worried about what "might happen" down the road. As a sample, listen to Panel 5 from June 27 composed mainly of associations connected to beef and dairy ranching (although it starts with dog and cat food-makers).
Public Comments
Back in May, USTR also published a Federal Register notice seeking public input into U.S. negotiating priorities-- standard practice for the U.S. enters any trade negotiations. If you have a lot of time on your hands, you can flip through some of the 12,400 submissions at regulations.gov. Given the state of modern trade politics and the especially poisonous nature of the NAFTA, that volume of comments doesn't surprise me. Equally unsurprising is the diversity in these comments. As you might expect, comments from sectoral interests are rather detailed and specific. Others, from individuals, cut right to the point; "Trump should completely abrogate NAFTA" full stop.
From all of this, the Trump Administration (well, really USTR Robert Lighthizer) has to come up with a series of initial U.S. bargaining positions; a tough task for the staffers currently sorting them all.
National Trade Estimate
For Canada, the usual suspects are things like restrictions on U.S. agricultural exports, including supply management. Canada's personal duty exemption for purchases made while abroad has always irked American legislators, particularly from border states. Taxes and regulatory burdens on wine, beer, and spirits exports to Canada are likely to be on the table. Subsidies to a range of Canadian industries such as aerospace (Bombardier) or lumber (softwood dispute) routinely make the NTE. Likewise for complaints about the lack of access to Canada's government procurement market, lax enforcement of intellectual property protections, barriers to services, and Canadian content rules on television and radio.
A remarkably similar list of irritants exists for Mexico. Technical barriers to U.S. market access including certain labeling requirements on electronics exports, a range of sanitary and phytosanitary barriers (health and safety rules) to U.S. agricultural exports, burdensome administrative barriers at the border, weak intellectual property protections and enforcement, barriers to Mexico's telecommunications market, and limitations on foreign investment in petrochemicals, transport, and retail are all on the U.S. radar.
Other Probable Agenda Items
In an earlier post on Fixing the NAFTA, I wrote in slightly more optimistic terms about these next several issues, suggesting there were ways to build upon or "fix" them. That glimmer of optimism has faded....
Labour and Environmental Side Agreements
The Labor and Environmental Side Agreements to the NAFTA are not technically part of the NAFTA. However, they are intimately connected to the passage of the original Agreement. No that I have read has put the Commission on Environmental Cooperation on the table as something in need of re-negotiation. However, given the Trump Administration's position on the Paris Climate Accords, his approach to environmental regulation generally, and his deep skepticism toward American participation in international agreements generally, I could easily envision a formal withdraw from the CEC if someone puts that organization on the agenda. That would be unfortunate.
Chapter 19
Chapter 19 of NAFTA 1.0 established a binational review process to look at disputes arising from the application of trade remedy laws. What did I just say? All countries have legal processes for hearing complaints from domestic stakeholders alleging foreigners are subsidizing and/or dumping their products into the domestic market, thereby harming domestic producers. The domestic legal defense against this has been the application of trade remedy laws, sometimes referred to as anti-dumping and countervailing duty laws.
NAFTA Chapter 19 set up a system of ad hoc review panels that states could invoke on behalf of their producers after a NAFTA Party applied their trade remedy laws. Put differently, if American authorities imposed anti-dumping or countervailing duties to Canadian imports after a complaint from an American producer, the Government of Canada could initiate formation of Chapter 19 review comprised of panelists from both countries to review the U.S. action.
A key misunderstanding by many about these panels is that they are binding; they are not. Instead, the scope of their review is limited to whether (in this case) the U.S. had applied its domestic laws to the Canadian imports appropriately. In short, Chapter 19 is very limited in its mandate and has no power to force countries to change their trade remedy laws.
Those of you familiar with the history of dispute settlement in North America will know that the bilateral Canada-U.S. Free Trade Negotiations (1985-1987) were nearly scuttled over Canada's insistence that trade remedy review be included and that Mexico entered the NAFTA talks in 1990 with Chapter 19-like provisions as a major negotiating objective vis the Americans.
In spite of it's limited scope, Chapter 19 has periodically been the target of significant criticism by some Members of Congress who view the panels as an extra-judicial breach of American sovereignty. Such has been the critique of Chapter 19 in the U.S. that no trade agreement subsequent to the NAFTA has ever included such a mechanism-- none. Given Mr. Trump's particular brand of "America First" nationalism, I can imagine Chapter 19 being scrapped. More importantly, I can't imagine anyone on Capitol Hill leaping to the defense of Chapter 19, even though U.S. stakeholders have availed themselves of the mechanism.
Kiss Chapter 19 goodbye.
Chapter 11
I can also imagine a NAFTA 2.0 without the so-called investor-state dispute settlement (ISDS) mechanisms of the NAFTA's investment chapter. Sovereignty is a key issue here as well, but on very different grounds. Investment as a part of broader trade liberalization agreements really made it's debut with the NAFTA in 1994. Prior to that, countries helped secure the investments of their multinationals in host countries through the use of Bilateral Investment Treaties (BITs). The NAFTA's Chapter 11 essentially trilateralized the U.S. BIT model and applied it to all three countries. Mexico, with its 20thC history of expropriation was thought to be the main target of these rules and ISDS (more on all of this here).
Controversy flowed from Chapter 11 from the start, particularly after ISDS cases were launched against Canada and the United States. In fact, to date, the majority of the NAFTA's Chapter 11 case load has been against Canada and the United States. Why the controversy? ISDS were designed to give private firms some legal recourse for challenging state measures that amounted to the expropriation of a private investment. More importantly, those rules were put in place to prevent the discriminatory treatment of an investment by the state on the basis of a firm being foreign. Problems arose when private firms began suing NAFTA governments over regulatory measures the firms alleged amounted to expropriation; in this case, the expropriation of a firm's revenue had those regulatory measures not been put in place.
As creative lawyers began exploiting some of the NAFTA's linguistic ambiguity to sue host governments, critics became alarmed that Chapter 11 was being used by private interests to challenge the regulatory power of the state. Indeed, while such rules have served as checks on arbitrary or discriminatory state actions against foreign firms, in some minds the NAFTA had created a legal mechanism for challenging sovereignty only available only to foreign firms.
There have been numerous changes to the legal language incorporated into the investment chapters of subsequent U.S. trade agreements, including affirmations of the explicit right of the state to regulate in the public interest, but investment has until now remained a core piece of U.S. trade policy.
Will that continue under Trump and will investment find its way into NAFTA 2.0? Maybe. In 2004 and again in 2012, significant reforms were made to the U.S. BIT Model in areas such as transparency and the reassertion of state regulatory power. However, in each of those reviews, a significant constituency in the U.S. argued that ISDS and investment generally ought to be dropped from future U.S. trade agreements. After all, they argue, the United States has a long history of stable property rights protections. Why should the U.S. open itself up to NAFTA-esq creative lawyering that could undermine the state?
The wildcard on investment is whether Mr. Trump will be persuaded by the nationalists around him that investment needlessly undermines national sovereignty or persuaded by the business community that investment protections for American investments abroad continue to have utility-- that's not a small or weak constituency, and Trump himself has experience with the perils of investing abroad.
However, my bet is the nationalists might win the day since there's little stomach in the Trump Administration for arguments implying the need for protection of offshore American capital when that capital. While it might be more efficient for American firms to deploy capital abroad (and hence the need for ISDS), many in Trump's circle and among his supporters will undoubtedly connect all of this to the politics of outsourcing.
If investment isn't nixed entirely, my bet is that it will be significantly curtailed in NAFTA 2.0.
Chapter 16
I was already a bit pessimistic about prospects for a modernization of NAFTA Chapter 16 (TN Visas for professionals), but am even more so now. Immigration reform in the United States is hideously poisonous in even the most favorable political climate; recall what happened to President Bush's 2007 proposals, or more recently the so-called Gang of Eight proposals from 2013? Today's travel bans, border walls, and the expansion of ICE deportations makes any talk of reforming the visa process for skilled workers or professionals from NAFTA countries a non-starter.
As I noted in my February post, the NAFTA managed something rarely achieved in any context, and never again in a U.S. trade agreement after NAFTA; the creation of an entirely new visa category, the TN Visa. This program hasn't been without its failings over the last 25 yrs, but how it survives at all in NAFTA 2.0 is unclear.
Buckle up
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| Source: Rick Dalvit/For the Capital Press |
I doubt we are going to get to NAFTA 2.0 smoothly. The Trump Administration will not be entering NAFTA "modernization" talks with any semblance of focus. I expect the unexpected. America's professional trade staff will work hard to hold everything together. But, without proper attention paid to all of this by a White House in crisis-mode, I expect chaos to swirl around the NAFTA talks. Indeed, I expect U.S. negotiating positions may change by the hour as impatience and impulsiveness move the goal posts on everyone.
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