Renegotiating NAFTA – What is at Stake for American Business?

Originally Published in the Fall 2017  WIIT Communique.

By Rufus Yerxa, President, National Foreign Trade Council

In January of 1993 I assumed the role of Deputy U.S. Trade Representative responsible for finalizing and securing Congressional approval of the then recently negotiated NAFTA accord. President Clinton had just been elected, and he had decided not to accept NAFTA until Canada and Mexico agreed to sign side accords on labor and environmental issues. It was a controversial linkage, leading to contentious negotiations with our two NAFTA partners, with business, labor and environmental groups and with our own Congress! But eventually a sufficient consensus was found among all, and the deal – along with the side agreements—was approved.

Now President Trump has decided, like Bill Clinton before him, that the deal struck by his predecessors is inadequate and needs revisiting. Why is that more problematic for business than what happened in 1993? Of course, the contexts are entirely different. The issue in 1993 was whether to undo trade restrictions and accept more open trade with Mexico (we already had a free trade agreement with Canada), whereas today open trade is already the status quo, and the issue for negotiation is how it should be changed. But beyond that basic reality, there are two other major differences. First, it was accepted from the outset in 1993 that President Clinton fundamentally supported the idea of free trade agreements, but wanted to ensure they evolved in a policy framework that respected the rights of workers and the need for progressive environmental rules. It was also clear that the additional negotiations would focus only on those two issues, rather than reopening the underlying agreement. But in the present NAFTA 2.0 exercise, President Trump has made little effort to sell the virtues of open trade, and in fact seems to believe most free trade agreements are inherently bad for our economy. He articulates a different model, based on vague notions of economic nationalism, which suggests he wants a more managed form of trade that guarantees a positive trade balance. Given this predisposition, it is not surprising that many of the Administration’s proposals thus far seem to point in the direction of making NAFTA more restrictive rather than more expansive. Secondly, the Administration has made it clear this time that all issues are on the table, and has not narrowed the negotiating objectives to a discrete list of items, meaning this could open the entire agreement to renegotiation.

In such an environment, the obvious challenge for American manufacturers, agricultural interests and service providers is to demonstrate why our past trade agreements – especially NAFTA – have been so critical to our nation’s success as a modern, technologically advanced economy. In fact, America’s future success in maintaining good jobs and robust economic growth in a rapidly globalizing world economy – where automation is a fact of life and where 95 percent of the world’s consumers are abroad – depends heavily on our ability to open global markets, so that our increasingly efficient producers can expand sales rather than shrink their workforces. Trade agreements are central to that goal, and nowhere has that been more aptly demonstrated than in the case of NAFTA. Canada and Mexico are now our two largest export markets, and altogether they now pay $600 billion annually for American goods and services. Although our exporters still face some problems in these two markets, NAFTA has succeeded in eliminating all tariffs and significantly reducing non-tariff barriers in both Mexico and Canada. As a result, U.S. exports have increased by more than 350% in real terms since the agreement went into effect. The expanding markets for U.S. manufacturers, service providers and agricultural producers have contributed significantly to the bottom line for our companies.

But the gains from NAFTA go beyond our increased exports to these two markets. North American integration of our production platforms has helped our industries compete more effectively with producers in Asia, Europe and other regions. In the autos sector, for example, integrated production has lifted our export competitiveness, increasing U.S. exports of autos to over 2 million vehicles annually – more than five times the volume of exports prior to NAFTA. In our most technologically intensive sectors – such as capital goods, machinery, electronics and IT – the wide-scale integration of production in North America has been critical to maintaining US global leadership in innovation and technological development.

NAFTA benefits our economy in a variety of other ways. Our truck and rail transport companies have a huge stake in the vast movement of goods between our three markets, with more than 100 trains and 5,000 trucks crossing our northern and southern borders each day. Our farmers now export close to $40 billion to Canada and Mexico every year. Our banks, insurance companies and accounting firms have made huge gains selling to both Canada and Mexico, part of the reason we enjoy a $34 billion surplus in services trade with our NAFTA partners. Finally, American consumers benefit from a much wider array of goods available at lower prices – from Mexican avocados to Canadian beer.

NAFTA also has another important benefit: It has given us a much more prosperous, stable and democratic neighbor to our south. Until it began opening up in the 1980s and 1990s by joining GATT and signing NAFTA, Mexico was a one-party state with a highly protected economy, state ownership of most industries, widespread poverty and significant out-migration to the United States. Today, Mexico is a multi-party democracy with a growing middle class, a more open economy a thriving private sector and net in-migration from the United States. It is worth noting that few big developing countries have opened their economies to a powerful developed partner so completely. In fact, U.S. exports to Mexico now represent 20% of its GDP, a remarkably high percentage (by way of contrast, imports from Mexico represent only 1.8% of our GDP).

From the perspective of U.S. business, any effort to modernize and upgrade NAFTA must preserve these hard-won gains. While there are many ways the agreement can be improved – particularly in areas like digital trade, state owned enterprises and small business that were not meaningfully addressed when NAFTA was negotiated over 20 years ago – any final agreement that diminishes our existing access to these markets will have significant adverse effects on our U.S. operations, sales and employment.

We are now in the midst of a crucial debate about how best to expand growth and opportunity for Americans. Do we seek to do so through defensive measures that try to restore market share for a few domestic industries, or do we continue the march towards a more open world where American know-how, innovation and entrepreneurial skill will set the pace, and where our producers and workers will have a chance to sell to the 95% of the world’s consumers who live outside our borders? In the coming months, as the Administration’s effort on renegotiation of NAFTA unfolds, that question will need to be answered.

About the Author: Ambassador Rufus Yerxa is President of the National Foreign Trade Council (NFTC), a trade association of over 200 companies dedicated to improving the competitiveness of U.S. industry on world markets. As president, he oversees NFTC’s efforts in favor of a more open, rules based world economy, focusing on key issues to U.S. competitiveness such as international trade and tax policy, economic sanctions, export finance and human resource management.

Mr. Yerxa has more than three decades of experience as a lawyer, diplomat, U.S. trade negotiator and international official. As Deputy Director General of the WTO from 2002 to 2013 he helped to broaden its membership and strengthen its role as the principal rules-based institution governing world trade. Prior to this, from 1989 to 1995, he served as Deputy USTR under both a Republican and a Democratic President, first as the Geneva-based Ambassador to the GATT (the predecessor organization to the WTO) and subsequently as the Washington Deputy. Earlier in his government career (1981 to 1989) he was with the Committee on Ways and Means of the U.S. House of Representatives, where he was Staff Director of the Subcommittee on Trade. After leaving government service in 1995 and prior to joining the WTO he spent five years in the private sector, first as the Brussels-based partner with a major U.S. law firm and later as European general counsel for a Fortune 500 company.

Mr. Yerxa received his BA in political science from the University of Washington (1973), his JD from Seattle University School of Law (1976) and an LLB in international Law from the University of Cambridge in England (1977). He is a member of the District of Columbia Bar, and is also a Visiting Professor with the Middlebury Institute of International Studies at Monterey (MIIS).

 

The views expressed by the author(s) of article(s) published in this newsletter are their personal views and should not be interpreted as the views of The Association of Women in International Trade (WIIT) or its individual members. See full disclaimer here.