Why Free Trade Foes May Get Even More to Dislike in the New Nafta  

S&P Global Market Intelligence
Written By: Paula Schaap
S&P Global Market Intelligence
Written By: Paula Schaap

During the 2016 presidential campaign, Donald Trump vowed to abandon the North American Free Trade Agreement if he couldn't work out a better deal for U.S. workers and to kill the proposed Trans-Pacific Partnership. The candidate said both treaties were bad for U.S. workers. While the administration appears to be following through on that agenda, talks to rework Nafta could end up producing a new agreement that looks even less protectionist than the current pact and more like the now-dead TPP.

In trying to deliver on Trump's promises, the administration's negotiators, led by U.S. Trade Representative Robert Lighthizer, Commerce Secretary Wilbur Ross and Agriculture Secretary Sonny Perdue, will attempt to wring concessions out of their counterparts from Canada and Mexico. But the U.S. team will simultaneously have to appease representatives of domestic industries who are making it clear they want more free trade, not less, between the three nations.

"If U.S. farm groups or major U.S. industries like autos oppose the renegotiated deal, it's dead," said Hogan Lovells international trade attorney Warren Maruyama.

Many of the 12,000 industry comments submitted on the upcoming negotiations called for greater access to markets in the three countries, where the value of goods traveling between the trading partners in 2016 was more than $1 trillion, according to the Bureau of Transportation Statistics. Lighthizer's office said more than 130 members of the public and stakeholders had been invited to speak at hearings scheduled for three days starting June 27.

Where Nafta is working

Measured strictly from the standpoint of new markets for U.S. goods, the 23-year-old Nafta has been a success. In 1993, the year before the agreement was signed, U.S. exports to Mexico were $41.6 billion, a Congressional Research Service report noted. By 2016, exports to America's southern neighbor had increased 470% to $231 billion, making it the world's second-largest market for U.S. goods.

Nafta had a less dramatic effect on trade between Canada and the U.S., primarily because the countries already had a bilateral free trade agreement signed by President Ronald Reagan in 1988. Still, U.S. exports to Canada increased 166% to $266.8 billion in 2016 from $100.2 billion in 1993.

The U.S. runs a trade deficit with Mexico: $64.4 billion in 2016, according to the Census Bureau. In comparison, the U.S.'s trade deficit with China that year was $347 billion.

And it is that deficit with Mexico that the administration is focusing on with its assertion that it can reverse a decadeslong flow of manufacturing southward and bring those jobs back to U.S. workers.

The U.S. auto industry accounts for much of that flow, according to the big three U.S. car makers. General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV said in a Nafta comment submitted through trade association Auto Alliance that U.S. auto exports totaled more than $56 billion for more than two million vehicles in 2016 – about a 138% increase from 2009 – making it America's largest export sector.

"More than half of those exports are to our Nafta partners, Canada and Mexico," the Alliance said.

Agriculture is another particularly touchy topic, but not the way those leaning toward U.S. protectionism would have it. Except for specialized disputes over dairy and certain kinds of lumber with Canada and sugar with Mexico – Ross just renegotiated the sugar issues – Nafta has been a success for U.S. farmers. As the Nebraska Farm Bureau noted in its comments: "Commodity by commodity, it's hard to understate the value of Nafta to Nebraska and Nebraska farm and ranch families."

Looking north and south

Of course, Mexico and Canada have their own domestic issues. For example, Mexico will hold a presidential election in July 2018 and populist Andrés Manuel López Obrador is running a strong campaign against incumbent Enrique Peña Nieto.

López Obrador "will be against anything that looks like a concession to the U.S.," said Gary Hufbauer, senior fellow with the Peterson Institute for International Economics.

Luis de la Calle, founder of consultancy De La Calle Madrazo Mancera SC, who worked on Nafta when he served as Mexico's Minister of Trade Issues, said there was irony in the U.S. threatening to leave the agreement. "The exit clause … was drafted because they thought that one day, Mexico may have a populist president and they may want to leave."

"The whole thing is upside down," he said. "Here you have Mexico trying to convince a Republican president that free trade is good."

And Mexico is also likely to seek protections for its own workers, which would result in increased costs, particularly for U.S. automakers, said Bank of America's Carlos Capistran, head economist for Canada and Mexico.

Canada, on the other hand, has several advantages, including its earlier bilateral trade agreement with the U.S. In addition, because Canada intends to stay in Nafta in partnership with Mexico even if the U.S. withdraws, Prime Minister Justin Trudeau could use his country's trade with Mexico as leverage to resist U.S. pressure.

Laura Dawson, a Canadian professor of international trade, now the director of the Canada Institute at the Wilson Center, said Mexico could serve as an ally for differences with the U.S. on many issues. One area where the trading partners could be aligned is contentious country-of-origin issues that dictate how much of a product must be made in a certain country to escape tariffs.

Trudeau "is very pragmatic and is working with the Trump administration," she said. Canada, however, is also "hedging its bets," Dawson added. It's already concluded a trade deal with the EU and is about to start negotiations with China, she noted.

Still, a major issue for Canada is something that's under review by the U.S. now: the question of whether imported steel affects U.S. security concerns and, therefore, should be subject to tariffs. With a decision expected from a special investigation any day now, EU members have already voiced protests and discussed retaliatory measures, the Financial Times reported.

That would also pose problems for Nafta negotiations, Dawson said. "If the U.S. were successful in attaching security interest to steel, that could be a problem because Canada and U.S. have integrated steel interests," she said.

Fast track deadline

Though Lighthizer told the Senate Finance Committee on June 21 that he didn't want to be bound to an "artificial" end-of-year deadline to produce a new Nafta, he does face real deadlines, trade experts said. That will keep the pressure on negotiators to reconcile a U.S. administration's ostensibly protectionist stance with the realities of modern trade. The Trump administration is operating under fast-track authority, in which Congress cedes its power to negotiate trade agreements to the White House. But that's set to expire in July 2018 unless an extension is requested and neither house disapproves, Maruyama explained.

"Any disapproval resolution has to go through the House Ways and Means or Senate Finance Committees, which have jurisdiction over trade issues and tend to be broadly supportive of bringing down trade barriers," Maruyama said in an email.

"There's a huge temptation for Congress to put in amendments," Hufbauer noted. Once the trade partners react to the amendments, "it kind of makes the whole thing impossible," he said.

One fact that could help speed negotiations, especially on updates to issues that weren't significant when the original agreement was signed – like the digital economy, along with some labor and environmental concerns – is that officials already have a blueprint: the Trans-Pacific Partnership agreement, Hufbauer said. The TPP, though, was another target of Trump's ire during the campaign and one of his first acts as president was to pull the U.S. out of the treaty, which already faced considerable Congressional opposition.

Nonetheless, Bank of America's Capistran agreed that the renegotiation would likely result in "an upgrade to Nafta that will be beneficial to the three countries and will look a lot like TPP."