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Is Trump's rewrite of NAFTA hurting a partnership?

Why We Wrote This

President Trump has long characterized NAFTA as "the worst trade deal ever." But it was also envisioned as a political partnership that enhanced regional stability.

Edgard Garrido/Reuters
The flags of Canada, Mexico, and the United States are seen on a lectern before a joint news conference on the closing of the seventh round of NAFTA talks in Mexico City, March 5, 2018.

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President Trump is seeking to rewrite NAFTA – the free trade agreement with Mexico and Canada. Last week, his administration reached a tentative deal with Mexico that incorporates labor and environmental chapters as well as intellectual property protections. And US officials say revisions concerning North America’s highly integrated automobile manufacturing sector would shift some lost jobs back to the US. But talks with Canada have so far failed to bring the top US trading partner into the tentative deal, and Mr. Trump is indicating that’s not necessary. NAFTA, however, was envisioned not just as a commercial pact but also as a strategic and political partnership — one that for over a quarter century succeeded in transforming Mexico and enhancing regional stability. Some regional experts say the US has adopted a transactional and divide-and-conquer tone that makes it seem a less reliable partner and endangers a “spirit of community” from which the US has reaped considerable benefit. Carla Hills, who negotiated the accord under President George H. W. Bush, said last week that “it’s time to modernize” NAFTA, but added: “We live in a world that is highly competitive. We need friends for economic but also for political reasons.”

When a North American trade agreement was first proposed under President Reagan, it was envisioned not just as a commercial pact among three countries but also as a strategic partnership.

Perhaps most critically, the idea was to anchor a problematic Mexico to its two democratic neighbors to the north, the United States and Canada, and build a prosperous and stable political and economic community.

A quarter century after NAFTA’s creation, the vision has in many respects come to fruition. In addition to building a highly integrated trade zone, NAFTA has played a key role in transforming Mexico from a one-party state prone to economic upheavals into an even-keeled democracy.

Instead of a Venezuela, the US has a stable 21st-century middle-income country as its southern neighbor – one the US and Canada can now count on as an ally and partner.

Now President Trump is seeking to rewrite NAFTA – and if it can’t be revamped to his satisfaction, then scuttle it altogether. As a result, many regional experts and political economists are cautioning that the political gains fostered by the pact could be damaged in the fray of an us-versus-them renegotiation battle that disregards the spirit of community underlying NAFTA’s success.

“Far more than a simple trade liberalization pact that would facilitate the exchange of widgets, there was a sense that, with NAFTA, the US and Mexico were now going to be reliable partners,” says Philip Levy, a senior fellow on the global economy at the Chicago Council on Global Affairs.

Noting that as part of its side of the bargain Mexico agreed to “locking in reforms and liberalization,” Mr. Levy says that 25 years later the US can indeed count on not just a stable Mexico but a partnership with both of its continental neighbors.

But he now worries that the fight over NAFTA’s future could set back the hard-won political gains of the pact and prompt both Canada and Mexico to look increasingly beyond a less-reliable US to build other global partnerships.

The tone of the NAFTA renegotiation “has painted the US as an antagonist that has to be handled,” he says. “I think that has damaged the partnership, but we don’t know yet how deep or lasting that damage will be.”

Regaining US jobs

The Trump administration last week reached a tentative deal with Mexico that updates the quarter-century-old NAFTA by incorporating labor and environmental chapters as well as intellectual property protections that were not part of the original pact.

The text of the new trade deal still remains largely under wraps. But the administration has revealed some key revisions concerning North America’s highly integrated automobile manufacturing sector that US officials say would result in a shift of some lost manufacturing jobs back to the US.

Under the new terms, 40 to 45 percent of a vehicle produced in North America would have to be made by workers earning at least $16 an hour. That provision presumably would require auto and auto-parts manufacturers to shift some production back to the US, where average wages are considerably higher than in Mexico.

In addition, the tentative deal would require that at least 75 percent of an automobile’s value be produced in North America (as opposed to, say, China) if that vehicle is to qualify for duty-free importation into the US.

Some US labor advocates who embraced Trump’s longtime characterization of NAFTA as “the worst trade deal ever” are lauding the president for championing US workers in the NAFTA rewrite.

Leaving Canada out?

But some experts say it is not so much the terms of the tentative deal with Mexico as it is the transactional and divide-and-conquer tone of the US approach that endangers a “spirit of community” from which the US has reaped considerable benefit.

Perhaps more than anything else, it is Trump’s stated willingness to conclude a bilateral deal with Mexico that leaves Canada out that alarms supporters of the North American partnership.

And then there’s the zero-sum approach of the White House to the trade talks that some say run counter to what NAFTA is about. On Friday, Trump was quoted as saying in an interview with Bloomberg News that any deal with Canada would be “totally on our terms.” The president condemned the release of what he said had been part of off-the-record comments to Bloomberg, but he then tweeted, “At least Canada knows where I stand!”

Talks with Canada aimed at bringing the top US trading partner into the tentative deal struck with Mexico broke off Friday without success, but the parties agreed to continue talks this week. Trump is under pressure from Republicans to preserve NAFTA as a deal among all three North American countries, but the president showed signs of chafing at the pressure from Congress.

“There is no political necessity to keep Canada in the new NAFTA deal,” Trump tweeted Saturday. “Congress should not interfere w/ these negotiations or I will simply terminate NAFTA entirely & we will be far better off,” he added.

Carla Hills, who was the US trade representative under President George H. W. Bush who negotiated the NAFTA accord, has been one of the most ardent advocates of preserving the breadth of a deal that from the beginning was about more than regulating imports and exports.

“It’s time to modernize” NAFTA, Ms. Hills said last week on MSNBC. But “let’s keep this partnership together that makes North America the most competitive region in the world,” she added. “We want friends, we live in a world that is highly competitive. We need friends for economic but also for political reasons.”

Sunset clause called harmful

Others say it is Trump’s insistence on some version of a sunset clause in the “new” trade deal that most undermines the sense that NAFTA was also a reliable and settled partnership.

The terms as spelled out in the draft deal “would turn North America from a quasi-permanent free-trade area into a quasi-temporary free-trade area,” says Stan Veuger, a resident scholar in political economy at the American Enterprise Institute in Washington.

The tentative deal struck with Mexico calls for a horizon of 16 years for the new terms, with provisions for a review of the revised pact every six years.

But those terms are not just problematic for businesses that base their investment plans on longer timelines, Mr. Veuger says. They also raise doubts about the long-term US commitment to the partnership, he adds.

“It just makes the US look like a less reliable partner,” he says. “When the NAFTA partnership seems less than permanent, it undermines part of the purpose of the deal – which after all was to encourage and secure Mexico’s integration into the broader international economy.”

Levy of the Chicago Council says there are already signs that Mexico and Canada are taking steps to diversify their trade and broader economic relations beyond a less-predictable US.

“Both neighbors are looking elsewhere, they went ahead with the TPP [Trans-Pacific Partnership] minus the US,” he says. Mexico is also taking on a leadership role in the Alliance of the Pacific, a grouping of Latin American countries linked by free markets, while Canada last year struck a comprehensive trade deal with the European Union.

Veuger also notes that Canada is deepening its trade relationship with Beijing in part by expanding its oil and gas exports to China.

Shared values

Still, many experts say that while the North American partnership won’t come out of the current shaking of its foundations unscathed, they are confident that the economic ties and shared values are strong enough to withstand the current buffeting.

That perspective may even be holding tight in Canada, which for the moment is Trump’s chief target in his bid to fundamentally redo NAFTA.

“The hardest part of this negotiation [to preserve NAFTA as a three-party deal] will be [US Trade Representative Robert] Lighthizer going to Mr. Trump and saying … we haven’t delivered a one-sided crushing defeat for Canada, what we’ve got is an agreement that is good for all parties,” says Gordon Ritchie, a former Canadian ambassador for trade negotiations. “And the question will be whether Mr. Trump can bring himself to agree to that.”

No one yet knows the answer to that question, but Mr. Ritchie asserts that the partnership forged by NAFTA, and the strong US-Canada ties within that partnership, will survive. “I think the relationship between Canada and the US is so close and deep,” he says, “that it will take more than one president to destroy it.”

• Sara Miller Llana contributed to this report from Toronto.

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