Even Free Traders Think NAFTA Needs an Update

Even Free Traders Think NAFTA Needs an Update

President Donald Trump on Thursday set a tight timetable for re-negotiating the North American Free Trade Agreement, calling the deal with Canada and Mexico “a catastrophe” for American workers.

Free traders don’t quite see it that way. But even they agree the 1994 pact could use an update.

“It’s just an old house that needs some work done,” Carla Hills, who served as the U.S. Trade Representative during the NAFTA negotiations, told Foreign Policy. She said there are “a host of things” that could strengthen the agreement.  

Other trade experts agree. They’re just not sure they want Trump in charge of the job after all his talk on the campaign trail of demolishing the pact and building a wall to stem illegal immigration from Mexico.

“He’s too fixated on tariffs and on Mexico paying for the wall,” Charles Skuba, a former trade official at the Commerce Department, told FP. “Let’s hope he thinks more comprehensively and is more deliberative and consultative” when talks actually begin.

Trump, speaking to lawmakers at the White House Thursday, named his commerce secretary Wilbur Ross as his top negotiator on the deal and set a 90-day timetable to open talks. Meanwhile, Mexican negotiators have agreed to meet with their American counterparts and are working on a similar timetable.

When NAFTA was ratified more than 20 years ago, the world economy wasn’t nearly as interconnected, and the internet barely existed. And the deal itself has reshaped the economies of the three participants, causing a surge in Canadian productivity and growth in Mexico’s manufacturing sector.

Canada is now America’s second-largest trading partner with $575 billion in total goods trade during 2015; Mexico is third, with $531 billion in two-way trade. From 1994 to 2000, the value of U.S. trade with Canada and Mexico grew at an average annual rate of 11 percent, compared with 8 percent with the rest of the world.

“What we want is to maintain free access for Mexican products, without restrictions, without tariffs and quotas,” Mexican Foreign Minister Luis Videgaray said earlier this week.

Here are a few areas of improvement the Trump administration and free traders might agree on:

Rules for digital products and data. “When we negotiated NAFTA, we didn’t have digital trade flows. You didn’t have a cell phone or laptop. We had no rules for that,” Hills said. Cross-border trade in items like smartphones is absent in NAFTA, for example, as is cross-border exchange of data such as digital music and movies. Hills suggested new regulations are needed to update NAFTA for the digital age. This would benefit the United States, where companies like Apple create digital products, and where Netflix creates digital content consumed around the world.

New regulations for cross-border shopping. Presently, American shoppers can buy up to $800 worth of products from retailers in Mexico and Canada — whether in a bricks and mortar store, or online — without having to pay an import tax. In Canada and Mexico, that dollar amount is much lower; Canadians can only purchase $20 tax free, and in Mexico, that amount is $50.

Such low thresholds are disincentives for Canadian and Mexican consumers to buy from American online retailers like Amazon or Etsy. Gary Hufbauer, a former trade official in the U.S. Treasury Department, told FP that Mexico and Canada could raise their minimum amounts to a few hundred dollars. That might incentivize them to buy more from U.S. online retailers.

Tighten rules of origin. These regulations dictate where products are sourced from. For instance, under NAFTA, 62.5 percent of the material in a light truck or car made in Mexico must be from North America to be able to enter America tariff free. Ross has suggested that he wants to renegotiate these rules to raise that minimum percentage, hoping to benefit the U.S. auto industry in particular, by cutting Asian factories out of the loop. Though Mexican officials are wary of “America First,” national-content rules in negotiations, they generally are open to tightening the rules of origin.

Change the name. Hufbauer said the acronym “NAFTA” is a dirty word for both Republican and Democratic protectionists. Changing the name might make a revised agreement more palatable for politicians and the public. “The political quest to bury NAFTA is so strong and has been endorsed by both parties, that maybe one of the big outcomes of this is that we say, “‘There is no more NAFTA.’” (Business groups have urged Trump to pull a similar cosmetic lift with the now-defunct Trans-Pacific Partnership, giving it a new name to keep benefits for U.S. exporters.)

It’s not just Mexico that is nervous about finding a way to tweak NAFTA: Lawmakers in U.S. states heavily dependent on Mexico also want the pact to stay. Texas shipped more than 15 percent of its total state products to Mexico in 2015, the third largest amount by state in the country. Tellingly, according to the Texas Tribune, the entire Texas GOP congressional delegation is opposed to changing NAFTA.

“It’s very clear that NAFTA has been good for our economy,” Rep. Will Hurd, a Republican who represents a broad stretch of the border in Texas, told FP. “We should be strengthening it and using it as a tool to improve North American competitiveness.”

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