The politics of NAFTA Renegotiations

December 19, 2017

The biggest benefit of trade agreements for most countries may be their ability to ‘lock in’ policy reforms.   Major reforms to significant economic sectors, such as agriculture or manufacturing, are rarely achieved via trade negotiations; few governments would welcome the appearance of being obliged to disrupt important domestic constituencies by surrendering their interests to foreign trading partners.  Sometimes governments desiring to make difficult reforms do use trade negotiations as leverage to support their own domestic goals.  In any case, as governments determine independently to implement major reforms, memorializing them in one or more trade agreements can build confidence around the durability of the reforms.   Thus, NAFTA became possible only after Mexico internally decided to dismantle the highly protectionist structure that characterized its economy in the 1960s and 70s.  Starting with NAFTA, Mexico built a network of FTAs with some 50 countries, aiming to ‘lock in’ its basic structural reforms, shifting from protectionist to open trader, and in the process becoming a major exporter of manufactured goods.

 

Some sectors – e.g. energy – were excluded from NAFTA as Mexico excluded them from its reforms of the 1980s.  More recently, of course, Mexico has adopted far-reaching reforms to the energy sector.  Other sectors – e.g. digital trade – were in their infancy and thus not addressed in the agreement.   There is now the opportunity to modernize NAFTA, fully incorporating the changes to the energy sector that have occurred in all three countries, and updating other chapters of the agreement to reflect the modern economy and best practices in areas like trade facilitation, competition policy, and environmental protection.   In fact, negotiators apparently are, in late November, close to agreement in 8-10 chapters that would constitute a valuable modernization of NAFTA, benefitting all three countries.

 

The big question being raised in these negotiations, however, is essentially a US policy question -- whether the US is undergoing a strategic policy shift away from free trade and toward a type of managed trade aimed at achieving numerical balance on a country-by-country or sector-by-sector basis.   There emphatically is NOT a consensus in the US favoring such a shift; in fact, polls show that the majority of Americans support free trade.  Farmers, manufacturers, service providers and consumers from both political parties support NAFTA modernization but adamantly oppose the ‘managed trade’ proposals by the Trump administration, and do not want this new approach to US trade policy to be ‘legitimized’ in NAFTA or any other trade agreement.   Republican Congressional leaders also apparently hold firm to their traditional free trade views.   However, Congressional votes on trade have always been close, and the President’s views on the issue do have a constituency.  There may be a belief among some politicians that opposition to free trade, especially NAFTA, can be the catalyst supporting a permanent shift of disillusioned blue-collar workers away from the Democrats to a reconstituted Republican party, based on the argument that such a shift of several thousand voters in some key states arguably provided the margin of victory in the latest Presidential election.

 

Much of the world is moving forward with Regional Trade Agreements – TPP-11, Pacific Alliance, the EU, Mercosur and Canada all look toward new FTAs without the USA.  By and large these trade opening agreements will benefit the global economy.   They will account for an increasing share of global trade and thus growth of global wealth – albeit leaving the US out.   But it is difficult to imagine that the US is truly prepared to undergo the structural changes imposed by a full shift to a protectionist economic model.  The US leadership eventually will realize that participation in the global economy is vital, and will seek to re-engage in a positive direction on trade.   The optimistic view is that this realization will occur before real economic damage is caused by the flirtation with protectionism.  Meanwhile, it will be an interesting ride.

 

* The opinions of this article are only of the author and do not bind any of the institutions with which he is affiliated.

Ambassador David D. Nelson is CEO and founder of ‘Global Policy DC’, a Washington-based strategic consulting firm, dedicated to helping companies navigate the complex environment of government policies affecting global business.  Ambassador Nelson launched this enterprise after completing six years working in the Global Government Affairs unit of General Electric (GE).  In that position, he worked with the US administration, Congress, financial institutions, business associations, embassies and foreign governments to help solve policy concerns and create market opportunities, with a particular focus on Latin America and Europe.  Amb. Nelson holds a B.A. in Economics and International Relations from the University of Wisconsin, and a Masters in Economics from the University of Maryland.

Topics: REGIONAL TRADE AGREEMENTS (RTAS)

Authors: DAVID D. NELSON

RTA

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