Leaders of all three North American Free Trade Agreement (NAFTA) member countries have now acknowledged the benefits that might be gained by renegotiating the 1994 regional free trade agreement. And, despite criticism of NAFTA as it currently exists, President Trump recently recognized the virtues of regional trade, declaring in a recent meeting with Canadian Prime Minister Justin Trudeau that both countries will “coordinate closely to protect jobs in our hemisphere and keep wealth on our continent.”
Of course, Mexico, with which the United States has a $63 billion trade deficit, not Canada, has been the main target of President Trump's criticism. Yet, Mexico, too, is open to renegotiating. Mexican President Enrique Peña Nieto has already commenced a 90-day period of consultation with the private sector that would precede expected renegotiation.
Although it is not yet clear whether and when a renegotiation of NAFTA would commence, U.S. Commerce Secretary nominee Wilbur Ross (who is getting a Senate confirmation vote on Monday) has said that renegotiating NAFTA is the new administration’s number one priority and that “all aspects of NAFTA will be put on the table.” Echoing this desire to renegotiate, U.S. Treasury Secretary Steven Mnuchin also expressed support for renegotiation, intimating that the now dormant Trans-Pacific Partnership (TPP) may be the starting point for renegotiation.
Indeed, there is a lot to be gained from renegotiation. While the U.S. economy has certainly benefitted under NAFTA, there are four main areas in which NAFTA may be improved for the benefit of U.S. business and job growth.
Labor and environmental standards
The labor and environmental standards in NAFTA were not included in the main text of the agreement, but were rather incorporated as weak side agreements that had no enforcement mechanism. One of the chief reasons why it is cheaper for companies to operate in Mexico is that the country has lower labor and environmental standards. While all three countries agreed to enforce their existing standards, Mexico has frequently fallen short.
Raising these standards in Mexico would make the U.S. more competitive and forestall any race to the bottom. Further, the labor and environment chapters of NAFTA were not subject to the agreement’s dispute settlement mechanism. The labor and environmental chapters of the TPP, which allowed member states to impose trade sanctions on countries that did not honor their commitments, may be used as a model for improving enforcement of Mexican commitments.
Rules of origin
Rules of origin in regional trade agreements require that goods contain a certain minimum value of regional content or undergo a specified amount of processing to qualify for the lower tariff provided in the agreement. Although one of the main goals of NAFTA was ensuring that goods entering from Mexico were not comprised of parts from Asia which were merely assembled in Mexico, these rules of origin could be significantly strengthened. More restrictive rules of origin would ensure that the benefits of NAFTA flow only to its members.
To ensure that goods coming from Mexico were not comprised of intermediate parts from Asia, the rules of origin in NAFTA require that there be a minimum amount of North American content to qualify for the free trade agreement's lower tariffs. However, given the increasing global integration of the automotive industry, it may be wise to impose higher regional value content requirements to benefit U.S. production.
Currently, 62.5 percent of the value of an automobile must come from either the U.S., Canada or Mexico before it can enter duty-free. Analysts would need to ensure the rules are not so restrictive that manufacturers have an incentive to leave the NAFTA area altogether, but there may be plenty of middle ground for compromises.
Negotiated more than 22 years ago, NAFTA does not address e-commerce, an issue that is particularly important for small and mid-sized businesses that benefit the most from e-commerce websites, like Amazon and eBay. Small and medium-sized American businesses could benefit tremendously if Canada and Mexico were to take steps to make it easier for them to export goods to both markets.
This means simplifying customs requirements and processing for e-shipments and ensuring open access to the internet. The U.S. has already raised the dollar amount at which goods may enter our country duty-free from $200 to $800. Canada and Mexico, both of which have much lower import values, should make the same commitment.
Although the U.S. runs a trade deficit when it comes to goods, it runs a trade surplus when it comes to services. This is because the U.S. retains a comparative advantage when it comes to most high-skilled professional services. This services surplus is particularly strong with regard to U.S.-Mexico trade. A renegotiated NAFTA could include provisions that make it easier for services to be rendered across borders, such as lowering complex licensing and registration requirements that are particularly burdensome for U.S. businesses.
Doreen Edelman is a trade attorney and co-leader of the global business team at Baker Donelson. She has more than 25 years of experience advising companies on import and export compliance, foreign investment and global expansion.
The views expressed by contributors are their own and are not the views of The Hill.