Although President-Elect Donald Trump was clear about the North American Free Trade Agreement on the campaign trail — he wanted major changes — how the issue unfolds is far from certain.
Officials in Canada and Mexico have proceeded cautiously since Trump’s election last week, but they have not exactly slammed the door shut.
“In practice, it’s going to be extremely hard because once a deal is done … all sorts of relationships are built.”
Trade is an area where the president has broad leeway to act alone. Trump, with the acquiescence of the other members, could open up the treaty for revisions. Or — he could withdraw the United States from the pact entirely. None of it requires congressional approval.
But political considerations will make major changes difficult, according to experts.
“In practice, it’s going to be extremely hard because once a deal is done … all sorts of relationships are built,” said Elaine Bernard, executive director of the Labor and Worklife Program at Harvard Law School. “Unwinding all that is difficult.”
What’s more, Bernard said, about 90 percent of the provisions of NAFTA were contained in the Canada-United States Free Trade Agreement that preceded it.
“Which one is he going to undo?” she said.
Trump already is getting unsolicited advice from business interests urging him to rethink his opposition to the 1994 treaty. Ford CEO Mark Fields, whose company plans to move small-car production to Mexico, told The Wall Street Journal that upending NAFTA would disrupt manufacturing in all three countries that now operate as a single market.
“The facts are when we look at something like NAFTA, production and supply chains are deeply integrated across the three countries,” he said. “A lot of that integration supports U.S. jobs, and we want to make sure we’re looking at those facts.”
Critics: NAFTA Was the Disruption
But longtime critics of U.S. trade policy argue that it was NAFTA that caused the disruption in the first place.
“In the process, NAFTA wound up being much different from the original stated intentions of many of its founding fathers, including Bill Clinton,” said Alan Tonelson, an economic policy analyst and author of “Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade Are Sinking American Living Standards.”
Tonelson said NAFTA proponents sold the deal as a way to create a market that would bring back manufacturing jobs lost to Asia by allowing for production in low-cost Mexico, with integrated supply chains creating jobs in all three nations. Meanwhile, products made within the trade zone would get preferential treatment over those made overseas, he said.
“Unfortunately, tariffs that NAFTA imposed on non-North American countries wound up being too low to do anything,” he said.
Trump said during a major economic policy speech in Pennsylvania in June that he would make NAFTA a high priority.
“I’m going to tell our NAFTA partners that I intend to immediately renegotiate the terms of that agreement to get a better deal for our workers,” he said against the backdrop of an aluminum facility near Pittsburgh. “And I don’t mean just a little bit better — I mean a lot better.”
Since Trump’s election, Canadian Prime Minister Justin Trudeau expressed willingness to update the terms of NAFTA.
“I think it’s important that we be open to talking about trade deals,” he told reporters last week. “If the Americans want to talk about NAFTA, I’m more than happy to talk about it.”
Mexican officials seemed less willing to contemplate a major overhaul. The country’s foreign minister, Claudia Ruiz Massieu, told Reuters that Mexico was willing to aim to “modernize” the agreement.
Economy Minister Ildefonso Guajardo Villarreal rejected a full renegotiation.
“We’re ready to talk so we can explain the strategic importance of NAFTA for the region,” he told Reuters. “Here we’re not talking about … renegotiating it, we’re simply talking about dialogue.”
Overall Economic Strategy Needed
Kevin Kearns, president of the U.S. Business and Industry Council, said tax reform, health care, and spending projects on roads, bridges, and other projects seem destined to crowd out trade as part of Trump’s first 100 days.
But Trump, who won on the strength of voters in Democratic-leaning, blue-collar counties in the industrial Midwest, will be under pressure not to let the issue drop. Kearns said he expects the new president to take up NAFTA in the first six months.
“I do think there’s going to be some sort of renegotiation,” he said. “The question is: How good will it be, and will it benefit the U.S. economy?”
Kearns said Trump would be wise to develop a comprehensive industrial plan and figure out how trade best fits into a strategy for protecting key sectors from unfair competition. That is what other countries do, he said, and the result is that a free market, laissez-faire philosophy has hurt American competitiveness.
Offering one example, he noted that the Chinese have stolen intellectual property from U.S. Steel and are using that pilfered technology to compete against the American company — and “dumping” products at below-market prices.
The impact extends far beyond the companies and workers that are harmed, Kearns said. He said the assault on the U.S. manufacturing sector has long-term consequences, since that is where 70 percent of private-sector research-and-development spending comes from.
“Renegotiation in and of itself doesn’t mean much unless you have an overall strategy for the U.S. economy, and Trump does not yet have that,” he said.
Trump has said little about specific changes he would like to see in the treaty. Kearns offered some possibilities. One idea would be for the United States to be allowed to impose a value-added tax (VAT) on imports. Most of the world’s countries have a VAT, which taxes goods at every stage of production.
Kearns said most countries rebate the VAT on exports, making products more competitively priced in the United States, where income, corporate, and other taxes are embedded in all goods produced domestically. He said imposing a VAT at the border, similar to a tariff, would level the playing field.
Another possible change, Kearns said, would be to raise the percentage of products that must be made in North America to qualify for lower tariffs. What is happening now, he said, is that overseas companies are opening assembly lines in Mexico and making products like cars that mostly are made in other countries.
“NAFTA was designed for the exact opposite effect,” he said.
Perhaps as important as trade deals are the appointees with responsibility over trade policy, Kearns. He said that includes obvious posts like the secretary of commerce and U.S. trade representative, but also treasury secretary and even secretaries of defense and state, since foreign policy considerations often influence trade.
Kearns said those officials need to be aggressive in responding to threats like currency manipulation by foreign governments and unfair trade practices.
“They have to be willing to take action,” he said.