The pain will be shared if Trump torpedoes ‘worst ever’ trade deal
Today sees the start of formal negotiations between the United States, Canada and Mexico on reforming the North American Free Trade Agreement (Nafta). While most parties are keen to see a new deal emerge, significant political risks surround the discussions, especially from the Trump team, which has threatened to terminate the agreement.
President Trump has already rescinded US participation in the Trans-pacific Partnership (TPP) with countries in Asia-pacific and the Americas, while negotiations for the Transatlantic Trade and Investment Partnership (TTIP) have not resumed, in any meaningful way, with Europe since the Obama administration ended. The TTIP proposals sought an agreement between the EU and United States to create a bloc accounting for around 50pc of global GDP, the largest regional trade and investment agreement in history.
With angst in financial markets about what the potential demise of the TPP and TTIP agendas mean for the future of international trade, speculation now centres 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, the agreement was the most comprehensive trade deal outside of the EU. And it was historic too, in the sense of 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 US, Mexico and Canada has more than tripled and forms the largest trading bloc in the world with a combined GDP of around $20 trillion (£15 trillion).
However, Nafta is only one of several fundamental drivers of continental prosperity over the last two decades. In truth, it is hard to isolate the precise direct impact of the agreement in these economic numbers, and it has long been criticised. For instance, US labour unions have blamed it for contributing to a hollowing out of the country’s manufacturing industry, partly because of increased trade deficits with Mexico and Canada.
There are now around an estimated 12 million US manufacturing jobs, down from some 17 million in 1994. However, Nafta is by no means the sole culprit here. For instance, a significant number of manufacturing jobs in the country (and indeed across much of the developed world too) have also migrated to emerging markets outside of North America.
From a different standpoint, even some previous advocates of Nafta have fallen out of favour with the deal, acknowledging that the impetus towards more liberalised trade among the three countries appears to have ebbed in recent years. This is partly because the three countries 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 that Mexico, Canada and the United States 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 institutionalisation 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 United States. Equally, and paradoxically, US politicians have generally disliked the idea of developing any pan-north American political institutions that could rein in US autonomy.
Trump jumped into this cauldron of criticism in the 2016 election campaign, 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 last November.
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. 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 that body too.
This highlights the difficulties of any fundamental reform passing Congress given that a wide body of US industry supports Nafta. Much of US business has urged that forthcoming negotiations should not jeopardise existing market access, and that the key negotiating principle should be “do no harm”, as highlighted previously by Robert Lighthizer, United States trade representative, during congressional testimony in June.
In recent months, the president has been much quieter about Nafta specifically, but the USTR stated last month that the top priority in forthcoming negotiations was reducing US trade imbalances, especially with Mexico, by ensuring more open, equitable, secure and reciprocal market access by breaking down remaining barriers to US exports, while potentially modernising Nafta for the age of ecommerce too. Trump and his team must now assess exactly how much overhaul is – politically – necessary to meet the expectations his own rhetoric has created 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 election on July 1 2018, Nafta sceptic Andrés Manuel López Obrador – who leads in recent polls – could win power in that country. The Left-wing populist has positioned himself as a big Trump critic and his “campaign of hatred” against Mexico.
Taken overall, significant political risks are clouding the Nafta renegotiation. Within a limited window of opportunity before the Mexican election, the Trump team must now live up to the president’s rhetoric of delivering fundamental change, or potentially need to walk away from the process.