The Challenges Facing the New NAFTA Negotiation

Stimson Spotlight

The Challenges Facing the New NAFTA Negotiation

By William Reinsch

Two weeks ago I talked in general terms about some of the forces at play in the looming NAFTA negotiation. This week let’s take a closer look at some of the likely issues. These seem to fall into four groups: new stuff, the stuff individual specific groups want, process stuff, and the stuff the administration wants so the president can say he kept his promise to the people who voted for him.

The first is the upgrade stuff — the addition of matters that were either not addressed in 1993 or where so much has changed that updated provisions are required. The obvious example is digital trade, which was in its infancy 23 years ago, but there are also IP-related issues, disciplines on state-owned enterprises, and other issues which were conveniently addressed in TPP. I have commented before about the irony of using TPP language to improve NAFTA and the likelihood that doing so will be more difficult than people think. It will be more complicated than just adding TPP language, but there is certainly a basis for negotiation and a willingness to deal, so there is reason to be optimistic about this part.

The second part, those things driven by individual groups, is harder to discuss and forecast, since each brings its own peculiar baggage to the table. Some, such as bringing back country-of-origin labeling (COOL) or reversing the trucking rule, are zombies where the U.S. has already lost at the WTO, in Congress, or at the negotiating table, and though they may reappear on the table, they should be sent back to the trade graveyard they inhabit. The fact that the administration ignored them is telling (Also missing is an attack on Mexican tax laws). Others are serious, albeit bilateral, issues that need to be resolved somehow, and if it cannot be done bilaterally, they will likely appear at the NAFTA table. Lumber and dairy are the two most obvious, although others like energy and government procurement could show up at the table as well.   

The third part, process issues, refers to chapter 11 and chapter 19 of NAFTA. Chapter 11 is the NAFTA version of investor-state dispute settlement, or ISDS. Chapter 19 is the special procedure for appealing and adjudicating antidumping and countervailing duty actions between the parties. ISDS has become the bête-noire of the anti-trade forces, and, despite its importance, it wins the prize as the provision most likely to be thrown overboard in order to feed the sharks. It will, however, be interesting to see how the Trump administration handles the issue. From one point of view it’s a provision designed to enable “our guys” to defend themselves in countries with corrupt or inefficient judicial systems, something the president ought to like. On the other hand, because it gives decision making authority to an independent tribunal, conservatives have attacked it as an infringement on our sovereignty. That dilemma may be why the administration has not had much to say about it yet.

Chapter 19 is a legacy of the U.S.-Canada Free Trade Agreement that preceded NAFTA. The Canadians insisted on it because they felt unfairly treated by U.S. unfair trade practice laws and wanted a means of redress. The Trump administration has marked this for repeal, and it will be interesting to see how big a fight the Canadians put up over it. 

Finally, we have the administration’s goals, detailed only this week. There appears to be something in them for everybody — both to praise and complain about. Every group had a victory or two, and every group had something that didn’t go as far as they wanted. Here are a few things I found interesting.   

1) Aside from explicitly making trade deficit reduction a goal without saying how it would be accomplished, much is taken from the negotiating objectives laid out in the 2015 TPA bill. NGOs that opposed that bill have also expressed disappointment with the NAFTA objectives as not going far enough. No surprise there, but it’s hard to fault the administration for sticking with language that Congress has already passed.

2) The rules of origin provision continues the ambiguity that appeared in the draft 8 page letter earlier this year by referring to “goods and materials from the United States and North America.” That does not rule out demanding a sub-requirement of U.S. content within a larger North American percentage, but neither does it say explicitly that is what they will seek. Doing so would be highly disruptive.

3) The digital trade language should please the financial services people but may be less than some in the high tech sector were seeking. In particular, it does not address fair use and safe harbor issues that are important to internet service providers, who may view the language as tilted in the direction of rightsholders.

4)  SOEs. The inclusion of this section is a significant nod to business which has wanted it as a precedent not for any Canada or Mexico specific reason. Also, it appears to go well beyond the TPP language, also a victory for the U.S. business community.

5) Labor and environment. Neither group will be satisfied, but I think they did pretty well. The language is to be incorporated into the body of the agreement and there is a reference to enforcement, although the details on enforcement are largely missing.

6) The government procurement goals are predictably unhelpful to Canada and Mexico. They make clear the president’s intention to give no ground on sub-federal procurement, on our many set-aside and preference programs for various groups, or our exceptions for national security and other priorities. 

7) Most intriguing is the concluding general provision which calls for exceptions for “the protection of legitimate U.S. domestic objectives, including the protection of health or safety and essential security, among others.” This may be boilerplate — or it may be the exception that swallows all the rules. It is certainly broader than what is in NAFTA currently.

Perhaps most significant, while there are tough issues here for the other countries, I don’t see any obvious poison pills. They could well be lurking in the underbrush and will appear later on, but at this point the administration has not shot itself in the foot before taking the first step.

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William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.

Photo credit: U.S. Customs and Border Protections via Flickr