Trump’s NAFTA demands, while politically challenging, may ultimately enhance trade environment
In its recently released 16-page document, the Trump administration announced its specific negotiating objectives for the upcoming NAFTA renegotiation process. The document states at the outset its objective to reduce the U.S. trade deficit with NAFTA partners. It then goes on to outline many broad, and sometimes inconsistent, negotiation goals that will presumably help achieve the U.S. administration’s overarching objective.
The vast majority of economists argue that a goal of achieving a trade balance with individual trade partners is policy nonsense. Nevertheless, this U.S. goal sets the broad background for the NAFTA renegotiations. It also serves as a warning that regardless of what is (or is not) agreed to during NAFTA renegotiations, trade relationships with the U.S. will always remain troubled so long as Washington holds the position that a (presumably persistent) trade deficit with any country is an unacceptable outcome.
While it’s beyond the scope of this blog post to cover in detail the stated objectives in the 16-page report, it’s worth highlighting some of the main points including some that could have been anticipated from previous announcements by the Trump administration.
For example, the report calls for reducing or eliminating tariffs and non-tariff barriers to U.S. agricultural products. It also calls for the elimination of NAFTA’S Chapter 19 dispute settlement mechanism and for the preservation of the ability of the U.S. to enforce its trade laws. Earlier this year, President Trump characterized Canada’s dairy supply management program as a disgrace. He also complained about the U.S. always losing in Canada-U.S. dispute resolution proceedings. However, it’s both interesting and puzzling that a section of the report encourages the early identification and settlement of disputes through consultation and other mechanisms, and even mentions establishing a dispute settlement mechanism involving panel determinations.
Other objectives that might have been anticipated include calls for updating and strengthening rules-of-origin, imposing standards of protection for intellectual property rights similar to those found in U.S. law and maintaining domestic preferential purchasing programs across a range of government procurement activities, while increasing opportunities for U.S. firms to sell U.S. products and services to NAFTA governments.
The report also calls for ensuring non-discriminatory treatment of digital products transmitted electronically across borders, as well as unrestricted cross-border data flows. A related request is to promote the competitive supply of telecommunication services by facilitating market entry. These latter objectives indirectly link to long-standing U.S. concerns about Canada’s cultural protection policies.
For example, as streaming video becomes the main mode for distributing entertainment programming, the unrestricted cross-border flow of digital signals would prevent the Canadian regulator from giving preferential access to Canadian-originated signals, which are more likely to carry Canadian content. As a related point, the report calls for reducing or eliminating barriers to investment in all sectors in NAFTA countries—a direct challenge to Canada’s foreign investment restrictions in domestic culture industries.
Arguably, a number of U.S. objectives will be politically problematical for Canadian negotiators to satisfy in that they would require substantive changes to government policies that currently subsidize well-established and influential interest groups such as farmers, broadcasters and Canadian media companies. While the changes are defensible as being in Canada’s long-run economic interests, one can expect the groups adversely affected will mount a strong and possibly persuasive argument that acceding to the changes amounts to a surrender of Canada’s political sovereignty.
The elimination of the Chapter 19 dispute resolution mechanism is a fundamental challenge to the benefits that Canada can anticipate from a renegotiation of NAFTA. The Canadian government has always seen the panel process as an important buffer against arbitrary U.S. trade actions affecting Canadian exports. To be sure, Canada would still have access to trade dispute procedures under the WTO. While some observers argue that the NAFTA dispute process is more robust, others point to the never-ending softwood lumber dispute as evidence that a clearer set of rules governing the application of trade actions against subsidies and dumping is really needed.
In this regard, there are a number of stated U.S. objectives that fair-minded Canadians should see as enhancing the bilateral trade environment, including a call to improve transparency with respect to regulations and technical rules. Expediting customs procedures and promoting greater regulatory compatibility are also sensible initiatives to improve trade conditions.
In short, U.S. demands impose politically challenges for Canadian negotiators but, in some ways, also create definite possibilities to clarify and improve rules and regulations surrounding bilateral trade. The U.S. demand to bring “strong and enforceable” labour and environmental provisions into the core of a new NAFTA agreement—rather than in side agreements, as is currently the case—should present no problem for Canada, although it might for Mexico.
A looming issue for Canada that has not been much discussed is what Canada’s position will be if Mexico and the U.S. cannot agree to a renegotiated NAFTA. Both the Canadian and Mexican governments have expressed a preference for a trilateral agreement. However, Canada might face a choice of successfully negotiating a separate bilateral agreement with the U.S. or accepting a failed renegotiation of a trilateral agreement.