NAFTA negotiations

The Five Lessons of NAFTA Negotiations

The Five Lessons of NAFTA Negotiations

The third lesson is that the details matter. Some of the provisions that are currently being ignored by commenters on NAFTA are buried deep in the texts and schedules.  These may turn out to be deeply consequential for NAFTA parties.  Some may also affect outside parties.  As an example, the auto rules of origin require a significant and growing share of autos, trucks, parts, components, steel and aluminum to be made within NAFTA (with more expensive labor inputs as well).  For suppliers based outside of NAFTA, this is going to be extremely problematic or even catastrophic.  These orders could be cancelled outright and never replaced. Alternatively, NAFTA 2.0 could force a renewed look at offshoring or sourcing entirely for export.  Either way, existing supply chains are likely to be under severe stress.

The fourth lesson is that NAFTA contains some problematic provisions that might spread elsewhere.

What Happens If NAFTA Collapses?

The damage would be swift.  Businesses, farmers and consumers have become so accustomed to NAFTA over the decades that most have forgotten what benefits actually flow from the agreement.  But focus on just the problems faced by US agriculture.  Right now, nearly all agricultural products go duty free into both Canada and Mexico.  Most items flow with limited paperwork and little customs hassle. This will not be the case if NAFTA ends. US exports of corn into Mexico will suddenly face tariffs of 10-15%.  Soybeans, grains and flours jump overnight to 10-15% as well.  Mexico is one of the best markets for US red meat exports, especially for many cuts that Americans do not favor.  Many of these products could face tariffs as high as 234%.

The New US Policy is Disruption: Implications for Asia

In short, evidence of last week’s US engagement in NAFTA, KORUS and 301 all provide a much clearer window into the extent of American disruptive trade policy.  While some staff members will be trying to hold the pieces together, it is not obvious how well they will fare when led by a President that views unpredictability as a key strength and does not place a high value on maintaining the global trading system.  For Asia, it will be difficult to rely on the United States in trade.  This is not to say that the US will simply disengage.  It is that the Americans will behave in ways that may not have been experienced in the past.  They will be less willing to defend the global trading system and more willing to take unprecedented risks to tackle what they view as unfair trade practices.  These challenges will be handled unilaterally, if necessary.

The Transforming Picture of “America First”

Because the United States is the world’s greatest market, it should—by definition really—run trade surpluses in goods with everyone.  The fact that it does not is therefore automatic evidence of cheating.  Bigger trade deficits are confirmation of deeper duplicity on the part of trade partners. The rest of the trade agenda, therefore, should be turned to figuring out how to stop everyone else from cheating by cracking down on such unfair practices and return the US to nothing but surpluses again.  This may mean using novel interpretations of laws or regulations to eliminate devious behavior from others. Admittedly, this trade agenda is not stated quite so baldly, but if boiled down to the essence, this is what it looks like. There appears to be no use in trying to use logic to unpick any element of this agenda and show how and why it is wrong, unlikely to bring about the desired results, or just plain crazy.  This is not an agenda that can be untangled by data, altered by evidence, or adjusted by argument.

Living with American Uncertainty

The NAFTA negotiations have implications for Canada beyond simply the talks in Washington.  If the United States is no longer a reliable partner, then Canada needs to start thinking about a different approach.  It needs to think about this now and it needs to do so quickly.  Canadian officials appear to have adopted a similar strategy to many other countries.  First, they have tried to figure out what the US is likely to want.  They have dispatched various delegations to DC to have conversations with the President and others. Second, they have started discussions with other countries. For Canada, this means starting negotiations with China on a free trade agreement.  These talks will likely take time to conclude, hence the urgency in beginning now.