Over the weekend, trade officials from the U.S., Mexico, and Canada wrapped up the fourth of seven rounds of renegotiations of NAFTA. While NAFTA is critically important to the entire continent, these discussions have created a host of new problems and offer little reason for optimism.
Heading into the renegotiation process, tensions between the three nations were already high. President Trump's pledge to build a wall on the southern border at the expense of Mexico infuriated many of our southern neighbors. A trade spat with Canada earlier this year led to mutually harmful tariffs on imported softwood lumber. And an unsubstantiated dumping claim filed by U.S.-based Boeing against Canadian aircraft manufacturer Bombardier led to a recent preliminary ruling calling for up to 300 percent tariffs on their planes.
While these are problematic anecdotes, they pale in comparison to the potential economic catastrophe that could result from eviscerating NAFTA entirely. Canada and Mexico are arguably our two most important trading partners. The three nations engage in more than $1.3 trillion in cooperative economic activity each year, which supports nearly 14 million jobs in the U.S., according to the U.S. Chamber of Commerce.
Our NAFTA partners are the top export destinations for U.S.-produced goods. Last year, U.S. firms exported $230 billion and $267 billion to Mexico and Canada respectively. Since the enactment of the trade pact in 1993, U.S. exports to Mexico are up 455 percent and up 165 percent to Canada. These are vital economic partnerships, and their dissolution would come at a steep cost to American workers, consumers, and entrepreneurs.
Yet, despite all of this, our trade negotiators have acted recklessly by making three unreasonable demands that endanger the entire process. These policies are essentially "poison pills" that could lead to the complete elimination of NAFTA.
First, the U.S. Trade Representative has reportedly requested a five-year window for the renegotiated deal, after which, the pact could expire. Trade deals have a major impact on sophisticated modern supply chains and investments. Businesses simply cannot make decisions about where to locate new factories or source supplies without long-term certainty. A five-year sunset provision would undermine the economic benefits of lower tariffs and render NAFTA nearly useless.
Second, the Trump administration has reportedly called for an opt-in provision for the Investor State Dispute Settlement program. This is an attempt to completely undermine ISDS, a program that allows private companies to seek recourse when foreign governments infringe upon their property rights. It's a controversial program — even among many free trade supporters — but there's little question that an ISDS opt-in provision would create political havoc and, in all likelihood, sink NAFTA entirely.
Finally, the Trump administration is unwisely seeking to increase rules of origin standards. These currently require 62.5 percent of the parts in an automobile to come from NAFTA countries to be duty-free under the deal. The USTR is reportedly trying to increase that percentage to 85 and add another requirement that 50 percent of content in autos must originate in the U.S.
Such a policy would actually reduce American manufacturing output. Instead of complying with these excessively restrictive and costly rules, most automobile companies would be far better off moving their operations overseas and paying the 2.5 percent tariff. This would result in not only fewer jobs and less economic activity as companies move factories and jobs abroad, it would also mean that American consumers would be paying a higher sticker price for cars.
There are many potential gains that could be made through NAFTA renegotiations. The pact was drafted in the 1990s, long before today's digital economy developed. Properly handled, this could be an opportunity to modernize the deal to reflect new products and services. Simultaneously, negotiations could offer a chance to open up some of Canada's protected markets and address state-owned enterprises in Mexico.
Unfortunately, thus far, it has been a forum for the U.S. to make unrealistic demands that could ultimately eviscerate the entire pact. This approach isn't just concerning — it's potentially catastrophic.
Brandon Arnold (@BrandonNTU) is a contributor to the Washington Examiner's Beltway Confidential blog. He is the executive vice president at the National Taxpayers Union.
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