July 19, 2017

Priority No. 1 for Trump's NAFTA Reboot: 'First, Do No Harm'

Daniel Griswold

Senior Research Fellow

At its best, the plan released Monday by the Trump administration to renegotiate the North American Free Trade Agreement (NAFTA) promises to modernize a generally successful 23-year-old commercial agreement with Canada and Mexico, our two largest export markets. But at its worst, the plan, if mishandled, could end up inflicting real and lasting damage to the U.S. economy and U.S. relations with our two closest neighbors.

Among its best features, the Trump plan seeks to “maintain existing reciprocal duty-free market access” for industrial and agricultural goods and to reduce non-tariff barriers. It calls for negotiating new rules to protect the freedom of cross-border data flows and to prohibit requirements for the use or installation of local computing facilities. It aims to “reduce or eliminate barriers to U.S. investment in all sectors in the NAFTA countries” and to curb the ability of state-owned and controlled enterprises to distort trade.

Those are all sound objectives and net improvements on the current NAFTA — ironically, all of them were key provisions in the Trans-Pacific Partnership agreement with Canada, Mexico and nine other countries that the Trump administration scuttled in January. 

On the negative side, the Trump blueprint for NAFTA seeks to “update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.” NAFTA rules already require that products must contain 62.5 percent North American content to qualify for duty-free treatment under NAFTA.

If the Trump administration insists on raising that share, it could inhibit the ability of U.S. manufacturers to export their products to Canada and Mexico. The U.S. auto industry has already warned that any upward adjustment could disrupt its established supply chains and its ability to sell its vehicles competitively throughout the NAFTA market.

The Trump plan for NAFTA wrongly fixates on the strawman of bilateral trade deficits, especially with Mexico. Deficits are not primarily driven by differences in trade barriers but by macroeconomic factors, such as growth rates and levels of national savings and investment. It’s especially wrong-headed to blame NAFTA for the persistent bilateral deficit since Mexico is one of the most open markets in the world for U.S. exports. 

The negotiating document also mistakenly blames NAFTA for closed factories and for millions of workers that it has supposedly “stranded.” While some U.S. industries have declined because of NAFTA, others have expanded. In the first five years of the agreement, 1994-98, the U.S. economy added more than half a million new factory jobs.

Job losses since then have been driven primarily by automation, and 300 million American consumers have enjoyed more affordable products, from cars to appliances to fresh produce, thanks to NAFTA. 

The most important fact to keep in mind as the administration renegotiates NAFTA is that the agreement has been a success. It has delivered on its basic promise to deliver more trade: Since its passage, two-way trade among the NAFTA nations has more than tripled to $1.2 trillion. Important U.S. industries, such as the automotive sector, have become more competitive under NAFTA’s integrated North American platform.

Last year, more than 12 million cars and light trucks were assembled in the United States. Real automotive manufacturing output, including parts and final assembly, has more than doubled since NAFTA went into effect. U.S. auto factories are exporting a record number of vehicles. 

As the Trump administration negotiates with our NAFTA partners, it should keep in mind the medical dictum: “First do no harm.” Let’s keep duties at zero rates where they belong, building on the core of NAFTA, while we seek to eliminate remaining non-tariff barriers. That will be the ultimate measure of whether President Trump can deliver a better deal.