Saturday, April 01, 2017

Trump Administration NAFTA Strategy

It appears the U.S. will not be withdrawing from NAFTA. At least not immediately.

Yesterday, a draft letter from the Acting USTR Stephen Vaughn to Congress made its way to the public. The letter notifies Congress of President Trump's intention to initiate negotiations with Mexico and Canada to modify NAFTA. Obviously, this was a big campaign issue for candidate Trump, who declared NAFTA to be a complete disaster for the American people.

The interesting thing about the draft strategy is that it is directed at making manufacturing more profitable "within the trading bloc." The President believes that will lead to job creation in the United States and support rural communities and service providers. The letter partially makes the case for NAFTA by noting that in 2016, the bloc accounted for $1.07 trillion in trade in goods and $139 billion in services. This is a fairly traditional, pro-trade, pro-NAFTA endorsement of the proposition that trade is a net positive.

However, the letter does a quick pivot to focus on the U.S. trade deficits with Canada and Mexico. The letter then states that NAFTA is out of date. Post-NAFTA free trade agreements have addressed modern concerns including digital trade, labor and environmental standards. In the NAFTA, labor and employment were added as "side letters" after the agreement was fully negotiated. According to the letter:

Reviewing these relationships will also demonstrate new leadership by the United States on trade. The very highest standards, the broadest coverage, and the most effective oversight and execution of the agreement's obligations will make the United States, and North America, stronger, a more attractive place to do business and a model for the rest of the world in the 21st century. This will reinforce our shared interests, promote our common values, and reinforce cooperation beyond economic issues to shared bilateral and regional security concerns. We expect to obtain results that improve on previously negotiated outcomes. 

This sounds like a reasonable place from which to start updating an agreement that is more than two decades old. So, what does the administration have in mind? The letter covers a lot of ground, but not in much detail.

Regarding trade in goods, it seems the primary goal is to remove lingering non-tariff barriers to trade in North America. The letter suggests market access between each NAFTA country and the United States. It also suggests addressing permits, licenses, and "and other trade restrictive measures." Textiles and apparel are called out for attention, as is the leveling "the playing field on tax treatment."

With respect to NAFTA rules of origin, the letter states as a negotiating goal:

Seek rules of origin that ensure that the Agreement support production and jobs in the United States, procedures for applying these rules, and provisions to address circumvention that ensure that preferential duty rates under the agreement apply only to goods eligible to receive such treatment, without creating unnecessary obstacles to trade.

Coupled with this, that letter suggests that the NAFTA countries should work together to improve their implementation of the WTO trade facilitation commitments including the transparent, efficient, and predictable application of the customs laws. The fact that the Administration favorably referenced a WTO commitment should give the WTO some satisfaction.

The letter goes on to provide goals relating to trade in services, intellectual property protection, sanitary and phytosanitary measures, and to bring enforceable labor and employment measures within the body of the agreement itself.

While these goals seem to be reasonably consistent with modernizing the NAFTA along the lines of the subsequent U.S. free trade agreements, there are a few more controversial issues raised in the letter. For example, the letter states as a goal establishing a rule that permits government procurement to be conducted in a manner consistent with U.S. law and the Administration's policy on domestic preferences. That might be inconsistent with current NAFTA Chapter 10 and the WTO Government Procurement Agreement.

An area of much concern to many on both the left and the right of the political spectrum is the NAFTA investor-state dispute settlement mechanisms. These are the arbitration panels the NAFTA implemented to settle allegations by an investor from a NAFTA country that a NAFTA failed to provide fair treatment to the investor. "Fair" in this context means consistent with how the country would have treated a domestic investor or an investor from another non-NAFTA party. The standard is "no worse" treatment and "fair and equitable" treatment. Many have suggested that these arbitral panels are an affront to national sovereignty because they penalize sovereign nations for regulating to protect, for example, the environment. On the right, people argue that the investor-state dispute mechanism lets unelected, non-appointed private parties overturn lawful regulations and policy decisions. On the left, people have argued that the mechanism allows corporate interests to overturn reasonable environmental, health, and safety measures. This letter does not do much to quell the fears on either side. It generally seeks to improve procedures, reduce frivolous claims, and ensure that U.S. investors are treated fairly.

Lastly, the letter says the U.S. will seek to completely gut the NAFTA Chapter 19 mechanism for resolving dumping and subsidy disputes. For non-NAFTA parties, challenges to decisions of the Department of Commerce and International Trade Commission relating to antidumping and countervailing duty cases are heard by judges of the U.S. Court of International Trade, who are appointed by the president to lifetime positions. Chapter 19 moved those cases to private arbitration panels. No subsequent agreement has included this mechanism and there is no reason to believe that the U.S. CIT and presumably the Canadian International Trade Tribunal and Mexican courts are not proper venues for judicial review of these administrative decisions. The letter seeks to move them back to the courts.

Overall, this letter is more moderate than I expected from the campaign and post-campaign rhetoric. It's general goal of seeking to modernize NAFTA seems laudable and appropriate. Of course, this is nothing more than an opening notification to Congress. The devil will be in the minutia of details concerning, among other things, rules of origin and customs procedures. There has been talk about some of the complexities of the NAFTA including the limitations on drawback and the automotive tracing rules. The thing to keep in mind is that much of the NAFTA was written in close consultation with the impacted U.S. industries. We have tracing, for example, because the highly integrated North American automotive industry wanted tracing to make it more difficult for non-North American producers to take advantage of NAFTA without making significant investments in the region and in regional suppliers. It is not clear that the industry sees it any different today.

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