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How to Renegotiate NAFTA

Summary:
WASHINGTON, DC – US President Donald Trump’s administration says that it is sticking with its campaign promise to renegotiate the North American Free Trade Agreement. Indeed, Trump has now reiterated his intention to invoke the procedures for renegotiating NAFTA soon (within “the next two weeks”), triggering a 90-day consultation period with the US Congress, before talks with Mexico and Canada commence. Assuming that happens – a very big if – it is worth asking how renegotiation could be done right. Of course, Trump could simply decide to abandon his promise to renegotiate NAFTA, which may be unpopular with many Americans, but is considered by economists to have been beneficial. After all, he has dropped many other campaign pledges, including (fortunately) his oft-repeated vow to label China a currency manipulator “on day one” of his administration. Another possibility would be for Trump to attempt to bully Mexico – the main target of his renegotiation plans – by, say, raising tariffs, in violation of NAFTA and World Trade Organization rules. In that case, it would be up to Mexico to respond. And Mexico does have some options. For example, it could raise tariffs to its old high “bound rates,” buying more corn from Brazil and Argentina and less from US farmers. Moreover, trade is not the only area where Mexico could retaliate.

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WASHINGTON, DC – US President Donald Trump’s administration says that it is sticking with its campaign promise to renegotiate the North American Free Trade Agreement. Indeed, Trump has now reiterated his intention to invoke the procedures for renegotiating NAFTA soon (within “the next two weeks”), triggering a 90-day consultation period with the US Congress, before talks with Mexico and Canada commence. Assuming that happens – a very big if – it is worth asking how renegotiation could be done right.

Of course, Trump could simply decide to abandon his promise to renegotiate NAFTA, which may be unpopular with many Americans, but is considered by economists to have been beneficial. After all, he has dropped many other campaign pledges, including (fortunately) his oft-repeated vow to label China a currency manipulator “on day one” of his administration.

Another possibility would be for Trump to attempt to bully Mexico – the main target of his renegotiation plans – by, say, raising tariffs, in violation of NAFTA and World Trade Organization rules. In that case, it would be up to Mexico to respond. And Mexico does have some options. For example, it could raise tariffs to its old high “bound rates,” buying more corn from Brazil and Argentina and less from US farmers.

Moreover, trade is not the only area where Mexico could retaliate. It could permit Central American migrants to pass through Mexican territory to the US border, rather than impeding them, as it currently does. It could curtail cooperation with US law-enforcement authorities in areas like drug crime. Most worrying, the Mexican people could respond to US provocation by electing their own nationalist president, Andrés Manuel López Obrador, in 2018.

But let us take at face value, if only for the sake of argument, that the Trump administration wants to renegotiate NAFTA in good faith. In that case, Mexico’s leaders say, “Okay, let’s get on with it.” In fact, the 23-year-old agreement could be improved in various ways.

For starters, NAFTA could be expanded to cover issues that did not exist when it was originally negotiated, such as e-commerce and data localization. Protections for labor could be improved as well, by guaranteeing workers’ right to form independent unions, banning child labor, and strengthening enforcement against human traffickers.

Likewise, negotiators could boost environmental protections, such as measures to safeguard the oceans and provisions for enforcing bans on illegal logging and trade in endangered species. These additional protections could be backed up by a dispute-settlement process and threats of trade penalties that are as credible as those underpinning the resolution of ordinary mercantile disputes.

There is also room for increased protection against corporate abuse of the investor-state dispute-settlement procedure. For example, negotiators could add provisions for the summary dismissal of frivolous suits, such as challenges by multinational corporations to a new regulation on the grounds that it will diminish their ability to earn profits.

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

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