The threat to “Kill NAFTA” was a consistent promise of Trump as a presidential candidate. Instead, while the threat remains, on May 18, 2017 the Trump Administration announced its intention to renegotiate the North American Free Trade Agreement (NAFTA). To what end? And what is the status of NAFTA renegotiations?

As of February, 2018, the three parties – Canada, Mexico, and the United States – have completed six rounds of talks. Reports are that progress has been made on the easier issues. For example, they have agreed on the rules for competition to achieve “procedural fairness in competition enforcement” and on enhanced anti-corruption measures.

The countries could be close to agreement in other areas as well. They are not starting from scratch. All three participated in the Trans Pacific Partnership (TPP) Agreement negotiations which concluded end of 2015. Although the United States withdrew from the TPP on Day 3 of the Trump presidency, its less-controversial provisions are a starting point and guide to the negotiations.

The broader challenge, however, is that Canada and Mexico, on one side, and the United States on the other, hold very different assessments of the current agreement and goals for NAFTA renegotiations. Consequently, an initial deadline of January 2018 to conclude the talks has come and gone, with no end currently in sight.

 

Modernize or Restructure NAFTA?

Canada and Mexico believe that NAFTA is working well. They are taking advantage of the negotiations to modernize the agreement.

The Trump Administration, however, says, “NAFTA has fundamentally failed many, many Americans and needs major improvement.” Administration statements suggest that the United States is experiencing a trade deficit with its NAFTA trading partners. Therefore, the US seeks not only to modernize NAFTA but also to restructure it so as to reduce the U.S. “trade deficit”. To that end, the US negotiators have introduced some controversial proposals that threaten to derail the talks.

NAFTA at 25: The “American” Hamburger

In a recent talk, Stéphane Lessard, Canada’s Consul General in Denver, illustrated how NAFTA has created an integrated supply chain for even the most American of institutions – the hamburger. Based on the patterns of agricultural trade, which has boomed under NAFTA, he presented the following possible scenario for the hamburger –

  • Bun baked in California with flour from Saskatchewan
  • Beef from cattle born in Alberta, raised in Nebraska, processed in Colorado
  • Bacon from pigs born and raised in Manitoba, processed in Iowa
  • Lettuce from Arizona
  • Ketchup from Ohio
  • Onions from Washington
  • Mushrooms from British Columbia
  • Tomatoes from Ontario

More widely known is the example of the automobile supply chain, which reportedly crosses North American borders 7 to 9 times during the production process.

Doesn’t this mean that the U.S. has lost jobs in industries where it was once competitive?

While NAFTA has created more jobs than it has displaced this is cold comfort to areas like the auto industry which has seen massive dislocation. An additional truth, however, is that more jobs are being lost to automation than to trade. A 2007 report by the Economic Policy Institute estimates that the U.S. lost 5.6 million manufacturing jobs between 2000 and 2010, 85% of them due to technological innovation. This pattern is replicated across NAFTA. American, and Canadian and Mexican, corporations are making more goods with fewer people.

As to the trade deficit, there is a small trade deficit with Mexico. Economic theory aside, from the perspective of US foreign policy this deficit could be viewed as one of the intended consequences of NAFTA – integration of the southern neighbor into the North American economy. With respect to Canada, the U.S. enjoys a trade surplus. (A trade in goods deficit disappears when oil is removed from the picture.)  The biggest US trade deficits are with non-NAFTA countries.

In sum, Canada and Mexico refute U.S. assertions and view of NAFTA. They believe that NAFTA has made the three countries stronger and more competitive, and the NAFTA trading bloc the strongest in the world.

Not surprisingly, the two countries, along with US industry, while willing to modernize NAFTA, are pushing back against the proposals of the Trump Administration that seek to restructure the trade agreement.

***************** (Read Part II – Tensions as Canada and US renegotiate NAFTA)