A NAFTA 2.0 Breakthrough? Don't bet on it yet....

The Sounds of Compromise?

There were some small glimmers of hope floated last week (March 19-23) that the NAFTA 2.0 talks were moving in a constructive direction. The source of that hope was testimony by USTR Robert Lighthizer before the House Ways and Means Committee on March 21 and Senate Finance on March 22. Specifically, Ambassador Lighthizer suggested there had be a convergence of positions on some of the most pernicious issues in the talks, notably on America's nonsensical position on rules of origin.


You can judge for yourself, but I'm not at all convinced.





If you listen to Lighthizer's statement in Mexico City after the conclusion of the latest round of talks on March 5, it doesn't sound like convergence to me. Listen carefully. On rules of origin, Lighthizer continues to advance the position that those rules should incentivize American manufacturing, even though most experts think the U.S. position on all of this will do exactly the opposite.

Moreover, the Trump Administration continues to advance the mistaken notion that America's trade deficit is the result of trade itself. The reality, of course, is that trade deficits are about bigger macroeconomic issues, including America's savings rate. Put differently, so long as America continues to borrow heavily to finance national expenditure-- as both the 2017 tax cut and last week's Omnibus spending bill do in spades-- America's trade deficit will continue to grow. Trade policy can undoubtedly be made more reciprocal and fair, but those things are entirely unconnected to whether a country runs a trade deficit.

ISDS Boogeyman

Last week, more than 100 Republicans on Capitol Hill wrote to Lighthizer warning against the proposed scrapping of the so-called investor-state dispute settlement mechanisms (ISDS) of the NAFTA. Many activists and scholars applauded the Administration's initial proposals to scrap ISDS, albeit for completely different reasons. I am not among those deeply worried about the pernicious effects of ISDS. In fact, as I have argued in this blog, I think ISDS retains significant utility. The NAFTA Chapter 11 did generate a scare or two, but governments have adjusted and the language being placed in investment chapters in modern trade agreements has cut off avenues for private interests to challenge the state's regulatory power.

Lighthizer's problem with ISDS is that he seems to think these rules incentivize outsourcing of jobs. In fact, ISDS rules have evolved in the postwar period to do exactly the opposite. America has no problem drawing capital flows inward. Indeed, according to UNCTAD the United States was far and away the top recipient and source of foreign direct investment flows in 2015 and 2016. Anyone who thinks ISDS rules incentivize large flows of capital out of the United States to places like Mexico or China need only look at the statistics to appreciate how little capital actually flows from developed to developing countries.

Sadly, another source of supposed convergence at the NAFTA2.0 negotiating table is Canada's agnosticism about Chapter 11. Indeed, given the difficult fight over investment in the CETA between Canada and the European Union, and Canada's mixed experience with Chapter 11, my strong suspicion is that the Trudeau government could live without ISDS in NAFTA2.0.

None of this is cause for optimism about progress in NAFTA2.0

Bucket of Cold Water

Dubya on Ice

Before we break out the champagne, let's have a reality check. First, there has been genuine progress in NAFTA2.0. In early March, three more chapters were completed for a total of six:

• Competition Policy
• Small and Medium Sized Enterprises
• Anti-corruption
• Regulatory Transparency
• Sanitary and Phytosanitary Measures (food safety and standards)
• Annexes on Chemicals and Food Formulas

Negotiators have recently claimed to be making progress on the 20+ chapters that remain, including e-commerce, technical barriers to trade, energy, and pharmaceuticals. Yet, on some of the most difficult issues, such as trade remedies, rules of origin, and sunset clauses, the Parties remain far apart. Indeed, in his statement at the end of Round 7 in Mexico City earlier this month (March), Ambassador Lighthizer expressed some frustration at the slow pace, the unfavorable electoral calendars in Mexico and the United States this year, and threatened to pursue bilateral agreements instead.

A Thickening Protectionist Soup

All of this supposed optimism around progress in the NAFTA talks comes against a depressing backdrop of overtly protectionist actions by the Trump Administration in recent weeks.  In January, the Administration imposed new restrictions on solar panels and washing machines (who knew they needed protection?), followed in March by across-the board tariffs on steel and aluminum.  The steel and aluminum tariffs were ostensibly imposed for national security reasons to prevent the destruction of America's steel industry by foreign (mostly Chinese) competition. As has become the tradition in this Administration, scant evidence was presented that America's national security was at risk from steel imports (the Department of Defense wasn't concerned). Moreover, when presented with evidence that America's steel and aluminum import profile was heavily skewed toward allies like Canada, the Trump Administration initially stood its ground.

A week later, the Administration began offering exemptions to allies like Canada, and signaled the permanence of those exemptions would be contingent on progress in the NAFTA talks.

In other words, capitulate to our demands on NAFTA or prepare to have the tariffs applied. One of the most striking things about Trump's world view on trade is how rooted it is in its conception of economic activity as it was in the 19th and early 20th centuries. Steel and aluminum are important. But so too are new technologies and productive processes that seldom get the same kind of attention from this administration.

Then, just last week, Treasury Secretary Steve Mnuchin was sent out to defend the Adminisration's announcement of some $60billion worth of tariffs on imports of Chinese goods. There are significant challenges in America's trading relationship with China. There is no doubt that resolving a host of market access barriers in the Chinese market is a desirable goal. Yet, like the steel and aluminum tariffs, these measures against China are an unsophisticated blunt instrument unlikely to do anything other than generate retaliatory measures.

Nevertheless, Mnuchin was out there on Fox News Sunday defending the actions, suggesting they were already netting results by bringing the Chinese to the bargaining table. Sure.

Just today, Ambassador Lighthizer was doing morning punditry claiming that the $60bn in tariffs had been arrived at through exhaustive study and were carefully calibrated. Note how many times he says "they had an algorithm," as if that legitimized the whole thing.

Oh, and the U.S. forced the South Koreans to revise the KORUS Agreement negotiated by the Obama Administration in 2010-- another case of "renegotiate with us, or else..." Trump has recently repeated his threat that the "or else" for South Korea includes the potential withdraw of U.S. military personnel on the Korean Peninsula.

Just Making Stuff Up

Finally, there's the basic fact that little the Trump Administration says can necessarily be trusted, nor can anyone be sure the goal posts won't be moved again in the near-term. A case in point was Mr. Trump insisting to Prime Minister Trudeau back in October 2017 that the U.S. had a large trade deficit with Canada. In fact, the U.S. runs a slight surplus.

I'm not quite sure how you are supposed to negotiate with anyone in the absence of a shared set of facts, or some trust that the other side is going to be reasonably transparent and truthful in the pursuit of their interests? Dealing with Trump and those around him makes this rather difficult; not unlike Charlie Brown's futile efforts to kick the football as Lucy inevitably pulls it away.


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