US eyes ‘big changes’ to NAFTA to match Trump rhetoric

American negotiators, with only a tight window of opportunity before the Mexican elections, must either walk away from trade talks or live up to the president’s promise of delivering fundamental change.

THERE are mounting signs that the North America Free Trade Agreement may be the next international treaty that Donald Trump has set his sights on to cull. As political risks grow from the US administration, alarm bells are ringing in Canada and Mexico, adding to angst about the future of international trade under the Trump presidency.

Only last week, US President Trump said that “if we can’t make a [NAFTA] deal, it’ll be terminated and that will be fine... So we’ll see what happens... I’ve been opposed to NAFTA for a long time”. While the president’s rhetoric is partly aimed at turning the screw on Canada and Mexico in negotiations, he appears now to be genuinely entertaining the prospect that the agreement could collapse.

On the trade front, Trump has already rescinded US participation in the TransPacific Partnership with countries in the Asia-Pacific region and the Americas. Meanwhile, negotiations with Europe for the Transatlantic Trade and Investment Partnership have not resumed in any meaningful way since the Obama administration left office.

With angst growing in various quarters about what the potential demise of the TPP and TTIP agendas means for the future of international trade, speculation now centers on NAFTA. This deal came into being in 1994 under Bill Clinton’s presidency and, despite being widely panned from both the political left and right, it is seen by many economists as at least a qualified success story.

When it came into force in January 1994, NAFTA was the most comprehensive trade deal outside of the EU. It was historic too in the sense of it being the first trade agreement negotiated between a developing country and two developed economies.

Since 1994, the North American economy has more than doubled in size, driven to a large degree by expanding trade and investment flows. Trade between the United States, Mexico and Canada has more than tripled and they now form the largest trading bloc in the world, with a combined GDP of about $20 trillion.

However, NAFTA has long been criticized as well. For instance, US labor unions have blamed it for contributing to a hollowing out of the country’s manufacturing industry, partly because of increased trade deficits with Mexico. There are now an estimated 12 million US manufacturing jobs, down from some 17 million in 1994. However, NAFTA is by no means the sole culprit here, as a significant number of manufacturing jobs in the country (and indeed across much of the developed world) have migrated to emerging markets outside of North America.

NAFTA has even fallen out of favor with some previous advocates of the deal, who acknowledge that the impetus toward more liberalized trade among the three countries appears to have ebbed in recent years. This is partly because the nations are perceived not to have been able to fully overcome numerous challenges, including tighter border security.

Another reason NAFTA is seen to have stalled is because Mexico, Canada and the US have increasingly preferred to push bilateral solutions rather than addressing opportunities and problems trilaterally. A key rationale for the prevailing lack of trilateralism in the continent is that the NAFTA architects fully intended to curb political institutionalization along the lines of the EU.

Part of the motivation here includes long-standing concerns in Canada and Mexico that strong common institutions would be dominated by the US Equally, and paradoxically, US politicians have generally disliked the idea of developing any panNorth American political institutions that could rein in their autonomy.

Trump jumped into this cauldron of criticism in the 2016 election campaign by calling NAFTA “the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country”. In key electoral states like Ohio and Pennsylvania, Trump’s championing of this anti-international trade agenda helped win him significant support in last November’s election.

Moving forward on this agenda in office, the White House reportedly drafted an executive order to withdraw from NAFTA in April, but this was not ultimately signed by Trump after high-level diplomacy from Canada and Mexico managed to forestall this. While the president could, in theory, terminate the treaty, the deal is underpinned by legislation in Congress and would therefore need to be repealed by legislators too.

This highlights the difficulties of any fundamental reform passing Congress, given that a wide body of US industry supports NAFTA. Much American business has urged that forthcoming negotiations should not jeopardize existing market access gains.

The United States Trade Representative Robert Lighthizer has said his top priority in negotiations is reducing US trade imbalances, especially with Mexico. He wants to ensure more open, equitable, secure and reciprocal market access by breaking down the remaining barriers to US exports, while potentially modernizing NAFTA for the age of e-commerce too. Trump and his team must now assess exactly how much overhaul is politically necessary to meet the expectations his own rhetoric has set, having said that “we’re going to make some very big changes or we are going to get rid of NAFTA once and for all”.

Yet, it is not just US political risks that hang over the renegotiation. If a deal cannot be done before the Mexican presidential election on July 1, 2018, NAFTA skeptic Andres Manuel Lopez Obrador, who leads in recent polls, could win power. The left-wing populist has positioned himself as a big critic of Trump and his “campaign of hatred” against Mexico.

This underlines that political risks over NAFTA may only intensify as the negotiations head into 2018. Within a tight window of opportunity before the Mexican elections, the Trump team must now potentially walk away from the process, or live up to the president’s rhetoric of delivering fundamental change.

QAndrew Hammond is an Associate at LSE IDEAS at the London School of Economics.