Lewis Morris / January 24, 2018

NAFTA Negotiations Bear Watching

Trade negotiators from the U.S., Canada and Mexico are meeting in Montreal this week.

Trade negotiators from the U.S., Canada and Mexico are meeting in Montreal this week for the latest round of NAFTA talks. The big question remains whether President Donald Trump will stay in or pull out of the 24-year-old agreement, which he claims is a terrible deal for the United States.

Scrapping the North American Free Trade Agreement (NAFTA) was one of Trump’s campaign promises although congressional Republicans and many members of the business community caution against such a move. An open letter to Trump from over 300 state and local chambers of commerce last October pointed out that NAFTA is responsible for 14 million jobs and $3.3 billion in trade on a daily basis.

The auto industry alone could face the loss of over 50,000 jobs if the U.S. were to walk away from NAFTA. As it stands now, U.S. Trade Representative Robert Lighthizer wants to tighten the rules of origin provision for autos, requiring that cars crossing the borders duty-free be 85% NAFTA made, up from the current 62.5%. He also wants to add a clause that requires these cars to be 50% U.S. made. Neither Mexico nor Canada are likely to agree to this change, which is likely a Trump-style “overreaching” negotiating chip.

Agriculture is another area that could be hard hit by a U.S. withdrawal from NAFTA. Farm products sent to Mexico and Canada have quadrupled since the beginning of NAFTA, and they currently account for a third of all U.S. farm exports. Leaving the agreement would bring a sharp rise in duties on American poultry and wheat, among other items. Farmers in states like Michigan, Missouri, Wisconsin and Indiana would be hard hit.

These states were key to Trump’s 2016 victory, and they will figure large in the 2018 midterms. Republican lawmakers from these states reminded Trump of this fact in the days leading up to the Montreal talks.

Trump makes the case that NAFTA has had a negative impact on America’s manufacturing sector, which has not grown as fast as the services sector since the agreement went into effect. So, while Lighthizer’s proposal to tighten the rules of origin provision might be considered extreme, manufacturing may need to be addressed — though with a caveat: U.S. manufacturing production has doubled since before NAFTA and is at a near-record high, albeit with fewer workers.

Technology is another area that needs to be addressed. Internet commerce didn’t even exist when NAFTA first went into effect, but now America’s most valuable companies are tech giants such as Apple, Facebook and others. Intellectual property and digital commerce will now need to be part of the conversation.

The American economy has grown significantly under Trump, but much of that progress could be undone by walking away from NAFTA or by altering it too much. Uncertainty about how the negotiations will shake out could also unsettle American markets. This is why the idea of adding a five-year sunset provision to NAFTA as proposed by Commerce Secretary Wilbur Ross was not well received. Such a move would keep NAFTA in a perpetual state of negotiation, making it difficult for U.S. businesses to make long-term plans based on predictable and established rules.

Negotiators hope to conclude talks and reach an agreement by the end of March.

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