PIIE Briefing 17-2: a Path Forward for NAFTA
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PIIE Briefi ng 17-2 A Path Forward for NAFTA C. Fred Bergsten and Monica de Bolle, editors JULY 2017 CONTENTS 1 Overview 3 C. Fred Bergsten and Monica de Bolle 2 The US Agenda: Trade Balances and the NAFTA Renegotiation 13 C. Fred Bergsten 3 Toward a Positive NAFTA Renegotiation: A Mexican Perspective 24 Antonio Ortiz-Mena 4 NAFTA Modernization: A Canadian Perspective 36 Wendy Dobson, Julia Tory, and Daniel Trefler 5 NAFTA Renegotiation: US Offensive and Defensive Interests vis-à-vis Canada 50 Gary Clyde Hufbauer and Euijin Jung 6 Updating the North American Free Trade Agreement 69 Jeffrey J. Schott and Cathleen Cimino-Isaacs 7 NAFTA and Energy 91 Gary Clyde Hufbauer and Euijin Jung 8 Agriculture in the NAFTA Renegotiation 101 Cullen S. Hendrix 9 Streamlining Rules of Origin in NAFTA 113 Caroline Freund 10 Rethinking NAFTA: Deepening the Commitment to Sustainable Development 125 Daniel C. Esty and James Salzman 11 NAFTA as a National Security Priority 140 John J. Hamre © 2017 Peterson Institute for International Economics. All rights reserved. The Peterson Institute for International Economics is a private nonpartisan, nonprofit institution for rigorous, intellectually open, and indepth study and discussion of international economic policy. Its purpose is to identify and analyze important issues to make globalization beneficial and sustainable for the people of the United States and the world, and then to develop and communicate practical new approaches for dealing with them. Its work is funded by a highly diverse group of philanthropic foundations, private corporations, and interested individuals, as well as income on its capital fund. About 35 percent of the Institute’s resources in its latest fiscal year were provided by contributors from outside the United States. Funders are not given the right to final review of a publication prior to its release. A list of all financial supporters is posted at https://piie.com/sites/default/files/supporters.pdf. This publication received support from Chubb Limited and the Centre for International Governance Innovation (CIGI). CHAPTER 1 Overview C. Fred Bergsten and Monica de Bolle The North American Free Trade Agreement (NAFTA) ranks at the top of anyone’s list of the most contro- versial trade deals of all time. Reviled by critics as unfair and as a job destroyer, praised by its defenders as having a documented record of success in spurring economic growth, NAFTA reduced tariff barriers to zero for the United States, Mexico, and Canada and led to a tripling of trade among these three countries over the last 23 years (figure 1). The Peterson Institute for International Economics (PIIE) has abundantly detailed the many gains and acknowledged costs of NAFTA in numerous publications (see, e.g., Hufbauer and Schott 2005; Hufbauer, Cimino-Isaacs, and Moran 2014). Now that President Donald Trump has launched a renegotiation of NAFTA—having at least for the moment abandoned his 2016 campaign pledge to cancel the pact outright after tentatively deciding to do so on April 22—the fundamental question is: Can such a renegotiation produce a positive result? A broad range of experts who have contributed to this PIIE Briefing say “yes.” The new negotiations can succeed only if they focus on how the agreement can be updated and upgraded, however. The overarch- ing goal of negotiators from the three participating countries must be to boost the competitiveness of North America as a whole, liberalizing and reforming commercial relations between the three partner countries and responding to the many changes in the world economy since NAFTA went into effect in 1994. These changes include the digital transformation of commerce, which has enabled sophisticated new production methods employing elaborate supply chains, transforming North America into a trinational manufacturing and services hub. But concerns about labor, the environment, climate change and energy resources, and currency issues have become more acute than they were at the time NAFTA started. Commerce Secretary Wilbur Ross was thus correct when he said that NAFTA “didn’t really address our economy or theirs [Mexico and Canada] in the way they are today.”1 C. Fred Bergsten, senior fellow and director emeritus, was the founding director of the Peterson Institute for International Economics (formerly the Institute for International Economics) from 1981 through 2012. He is a member of the President’s Advisory Committee on Trade Policy and Negotiation. Monica de Bolle is senior fellow at the Peterson Institute for International Economics and adjunct professor at the School of Advanced International Studies at Johns Hopkins University. 1. “Commerce Secretary Wilbur Ross talks trade,” Wall Street Journal, June 18, 2017, www.wsj.com/articles/ commerce-secretary-wilbur-ross-talks-trade-1497838380. 3 Figure 1 US-NAFTA goods and services trade, 1993–2016 billions of US dollars 700 US exports to NAFTA US imports from NAFTA 600 500 400 300 200 100 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Note: Pre-1999 services data based on data using BEA methdology, which has since been revised. Sources: UN Comtrade via World Bank’s World Integrated Trade Solutions (WITS) database for goods data; US Bureau of Economic Analysis for services data. Ultimately, however, NAFTA can be modernized only if President Trump’s zero-sum “America First” agenda is replaced by one that seeks to benefit all three countries and improve their competitiveness in an increasingly competitive global economy. Prioritizing American interests is of course essential in any US trade negotiation. But an obsessive concern about bilateral trade balances and narrow special interests in the United States, as opposed to broader national and regional interests, would not only deadlock the negotia- tions but also likely lead to inferior outcomes for all three countries, or even a breakdown in the talks and an abrogation of the agreement. And walking away from NAFTA altogether would be disastrous for consum- ers, producers, and retailers in the United States. As argued in several chapters of this Briefing, abandoning NAFTA would degrade regional competitiveness and terminate jobs across North America, undoing the integration achieved since the agreement’s inception. WHY NAFTA MUST BE RETAINED President Trump in fact tentatively decided to withdraw the United States from NAFTA on April 22.2 He subsequently relented, in response to protests from both the leaders of Canada and Mexico and a number of his own top officials and US business leaders, in favor of his earlier call for renegotiation “to get a better deal for the United States” but reiterated (including to the foreign leaders) that he would terminate if he is “unable to make a fair deal for the United States.”3 If that renegotiation fails to satisfy the US adminis- 2. Ashley Parker, Philip Rucker, Damian Paletta and Karen DeYoung, “‘I was all set to terminate’: Inside Trump’s sudden shift on NAFTA,” Washington Post, April 27, 2017. 3. Robbie Gramer, “Trump Pulls Back from the Brink of NAFTA Withdrawal—For Now,” Foreign Policy, April 27, 2017. 4 tration and Congress (where many Democrats are also hostile toward NAFTA) as well as the two partner governments,4 a breakup of the world’s largest economic compact is a real possibility, in the same way that Trump withdrew the United States from the Trans-Pacific Partnership (TPP) after seven years of negotia- tion on his third day in office. Such a breakup would significantly damage the economies, competitiveness, and consumers of all three countries. The costs would stem importantly from disruption of the supply chains that have come to domi- nate their trade flows and play important roles in their overall economies. As developed in chapter 2, the United States would face tariffs at least twice as high, and perhaps ten times as high, as those it could impose on Mexico, disrupting numerous sectors in the economy (notably including agriculture). It would confront discrimination by Mexico in favor of the 43 countries (including Canada, the European Union, and Japan) with which Mexico would continue to have preferential trade agreements, a list that will increase if Canada and Mexico along with the other members succeed in implementing the TPP without the United States. It would lose sales to a weakened Mexican economy with a substantially weaker peso. The US bilateral trade deficit with Mexico would undoubtedly increase, perhaps sharply—an outcome opposite to that sought by Trump. There is thus substantial risk of a lose-lose outcome. There is little point in attempting to assess who would lose most in a scenario where all three countries would experience negative effects. Any negotiation that turns confrontational can of course invite such a collapse. UK Prime Minister Theresa May has, for example, argued in the negotiations over Britain’s withdrawal from the European Union that “no agreement is better than a bad agreement.” In this case, however, “a bad agreement” could well mean no agreement at all. The NAFTA governments would be courting disaster if the renegotiation descends to such a level. ACHIEVING SHARED GOALS IN RENEGOTIATION Renegotiating NAFTA is not a new idea. President Barack Obama proposed it during his campaign for the presidency in 2008, and the NAFTA participants in the ill-fated TPP discussions—which included the United States, Mexico, Canada and nine other countries in the Asia-Pacific rim—sought in part to update NAFTA. The TPP embodied a readiness by the United States, along with Canada and Mexico, to update NAFTA to the mutual benefit of all participants. A popular fallacy about trade in general, and the negotiations over revising NAFTA in particular, is that trade and trade agreements are a zero-sum game and that whatever benefits one country in a trade deal necessarily hurts its trading partner in that deal.