Some form of NAFTA renegotiation seems imminent. What parts of TPP help point the way ahead?
Max Moncaster | February 13, 2017
Guest contributor Max Moncaster is a consultant and writer specializing in trade and economic development policy. He previously served as an advisor to the Canadian Minister of International Trade.
While renegotiation of the North American Free Trade Agreement (NAFTA) is on the horizon, President Trump has given no detail on his desired outcomes — only that he wants a “better deal” for America. Amidst the relatively few clues elsewhere, Treasury Secretary-nominee Steve Mnuchin’s recommendation that the Trans-Pacific Partnership (TPP) serve as a “starting point” for NAFTA talks may be particularly instructive. Which parts of TPP might help point the way ahead?
The Context
North American supporters of TPP thought the 12-nation trade deal provided a sorely needed update to NAFTA, which came into force over two decades ago. President Obama himself argued that through the TPP the U.S. could “bring NAFTA up to code.” But much has changed since the conclusion of TPP negotiations in October 2015. Each of the so-called “Three Amigos” (the United States, Canada, and Mexico) is facing a dramatically altered landscape driven by President Trump’s stance on trade and the Administration’s skepticism for multilateral agreements.
The implications for NAFTA negotiations are not entirely clear. Even if Commerce Secretary-nominee Wilbur Ross — Trump’s apparent choice to lead the talks — implements a bilateral negotiating approach once confirmed, there is little to suggest the final outcome would unwind NAFTA and replace it with two bilateral deals. Regardless of how the Administration feels about NAFTA, any significant changes would need congressional approval, and House and Senate members on both sides of the aisle have expressed serious concern over disruptions to existing North American supply chains. Mexican President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau also share an interest in maintaining the NAFTA zone, not least to ensure their companies are not cut out of immediate economic benefits or future expansion. Any “bilateral” approach will therefore likely be a matter of tactics, with the final agreement packaged as NAFTA 2.0.
The Issues
Small Business and E-Commerce
Two aspects of TPP which could be folded into a revamped NAFTA relatively easily are the e-commerce and small business chapters. The Internet has enabled an explosion in e-commerce, accompanied by an increased volume of cross-border transactions and shifting business models. TPP provisions which prohibit the imposition of duties on digital products and deal with other digital economy issues would all seem to be likely candidates for NAFTA 2.0. Similarly, all Three Amigos have repeatedly voiced their commitments to supporting small- and medium-sized companies. The relatively simple small business provisions found in TPP are not likely to be controversial.
Automotive Rules-of-Origin
Tightening the current NAFTA rules-of-origin in the automotive sector is reportedly a priority for Commerce Secretary-nominee Ross. Rules-of-origin specify the threshold of content a specific product needs to qualify for preferential tariffs in a free trade zone. During TPP negotiations, Japan successfully secured a content threshold below the current NAFTA level for automobiles. Since Japanese auto supply chains are closely integrated with Asian automotive parts suppliers, lower content requirements would have allowed Japanese manufacturers to maintain their existing supply chains while still exporting cars to North America under preferential terms.
In the NAFTA context, negotiators can focus exclusively on the North American production platform, which is already closely integrated. Tightening rules-of-origin provisions in NAFTA would ultimately mean that more content would have to be produced in the existing NAFTA zone, and certain elements of the automotive sector in all three countries would likely stand to benefit (particularly smaller suppliers). Whether North American auto firms could weather the transition while remaining competitive is an open question which warrants a much more detailed analysis.
Government Procurement
Whenever talk of infrastructure spending reaches the halls of Congress, Buy America is never far behind. Today the Trump Administration’s motto of “buying American and hiring American” is adding to the chorus of traditional supporters, such as Senator Sherrod Brown of Ohio, who believe that taxpayer-funded infrastructure projects should be made with American labor and American parts. TPP did not fundamentally alter any existing NAFTA commitments, which allow some Federal government procurement, and all state and local government procurement, to include Buy America provisions. The question for a renegotiation with Canada and Mexico, then, is whether the Trump Administration would seek to expand Buy America protections even further. Mr. Ross has stated that Buy America can and should be used as a policy tool, but gave no indication of his position on the current NAFTA commitments. Whatever the case, any future actions will need to be calibrated to avoid running afoul of WTO rules or spurring retaliation from Canada and Mexico.
Labor and Environment
The Obama Administration trumpeted the labor and environment provisions of TPP as a major win for the United States and workers around the world. They argued that by subjecting environment and labor commitments to formal dispute settlement (a process previously reserved for traditional market access issues), TPP would address labor and environment enforcement challenges that plagued older trade agreements. The AFL-CIO and other TPP opponents were more skeptical, fearing that TPP — like NAFTA before it — would incentivize manufacturers to relocate to countries with lower labor costs and weaker environmental standards. Mr. Ross echoed these concerns in his Senate confirmation hearing, noting that the relatively stagnant wages for Mexican workers over the past decade is an issue which needs to be addressed. Given President Trump’s vociferous criticisms of TPP, Mr. Ross may need to find a different labor and environmental enforcement solution for a NAFTA overhaul.
Investor State Dispute Settlement
Another one of Mr. Ross’ reported priorities is the Investor-State Dispute Settlement (ISDS) provisions of NAFTA. Chapter 11 of NAFTA allows parties to trade disputes from Mexico or Canada to refer cases to ISDS panels rather than American courts. ISDS systems have frequently been a target of free-trade critics, who argue that the panels are secretive and favor corporate interests. Mr. Ross may harbor separate critiques, namely that ISDS exposes U.S. companies to unfounded dispute claims. The U.S. record on ISDS hardly bears this out: According to USTR, despite having 50 ISDS agreements in place around the world, the United States has never lost a case.
Biopharmaceuticals
Criticisms of the final outcome on biopharmaceutical patent lengths have continued to haunt the Obama Administration since TPP was signed. Despite congressional misgivings, the TPP outcome of five years of full protection plus three years of additional measures (“5+3”) was a hard-won resolution. Developing economies and countries with public health systems, concerned about rising drug costs, were united in their opposition to the U.S. proposal of 12 years of protection.
The U.S. may hope to rework that outcome in the NAFTA context. Canadian patent law as it relates to the pharmaceutical industry has long been a target on the United States Trade Representative Special 301 Report. The 2016 report noted “serious concerns” about Canadian actions on pharmaceutical patents and argued that its unpredictability undermined investments. Nonetheless, any outcome beyond 5+3 will be a tough sell for Canada and Mexico.
As the Trump Administration presses forward with renegotiating NAFTA, businesses and stakeholders in the trade community are bracing for a new era in North American trade relations. An overhaul of the agreement that has underpinned the economic relationship of the Three Amigos could happen relatively quickly. The impacts on North American prosperity and global trade flows will likely be felt for many years to come.
