July 10, 2018

Could Change in Mexico Spur NAFTA Reform?

Christine McDaniel

Senior Research Fellow

President Trump recently congratulated Mexico’s incoming president Andres Manuel Lopez Obrador, saying there is much to be done that would benefit both countries. Lopez Obrador is eager for a good start with Trump and even told a reporter, “We are not going to fight.”

Both should approach the relationship with cautious optimism, especially if it means modernizing the North American Free Trade Agreement.

Lopez Obrador — a leftist who once opposed NAFTA and expressed desires to undo some key reforms — has more recently called for good relations with the United States as he seeks to improve the lives of Mexico’s poor and middle classes. Trump and his team should seize on this fresh start. That, however, will require a shift in their thinking.

A worthwhile NAFTA update would include rules to protect the type of digitally enabled trade that helps small and large firms alike. It would eliminate the few remaining barriers that U.S. firms face on trade and investment across North America. It would lock in stronger rules on intellectual property to protect American businesses, and boost regional energy security that we all rely on.

But Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer are looking in the wrong direction. Instead of pursuing a pro-growth modernization of the agreement, they are stuck with an ill-fated obsession with the trade deficit. Unfortunately, they seem intent on doing away with investor protections, forcing government intervention and government-set wages in the Mexican auto sector, and even letting the whole agreement expire in five years with a so-called sunset clause.

These “solutions” are a virtual lock to do more harm than good for the United States, while leaving Mexico with nothing to claim.

It defies logic that, as the United States moves away from labor unions and toward a more flexible legal and regulatory labor market framework, we would insist that Mexico do the opposite by pushing for a higher minimum wage in its auto industry. This would raise costs and threaten the competitiveness of automakers in the United States, who are perplexed by the policy proposal. Not to mention, the move would destroy Mexican jobs. Why not let Mexico set its own labor laws according to its own domestic policy needs?

Dictating to auto manufacturers on precisely who can source what from where in an unavoidably global industry is naive at best and borders on the type of state interventionism that we Americans condemn abroad.

The NAFTA sunset clause is an exit ramp to nowhere, depriving every single North American firm of the real gems of free trade agreements: greater investor confidence, less red tape, and permanent access to more customers.

Trump’s team should know better. History shows that when a trade negotiating team has done its homework and makes a strong and broad economic policy case, it can usually herd enough cats both in Congress and with our trade partners to make it reality. But this administration’s team has not done its homework. Their eyes are on the wrong target — the trade deficit — and this has left them with misguided calculations.

The trade deficit is a phony issue. This simple accounting measure has nothing to do with trade policy. If you invest more than you save, as we do, then you need to finance that investment from elsewhere. No one is getting ripped off: The amount of dollars coming into the United States equals the amount leaving the United States.

Why not bring NAFTA into the 21st century? It’s time for our senior officials to turn to the real issues that will benefit a wide swath of U.S. firms, workers and households. Work with Mexico’s new president to implement pro-growth reforms, prevent Mexico from slipping backward, and stabilize our corner of the world.

Mr. Ross and Mr. Lighthizer promised to do no harm on NAFTA. Congress should hold them to it.