A stronger NAFTA will boost US economic power against China
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President Trump has formally notified Congress that renegotiation of the North American Free Trade Agreement (NAFTA) will commence this fall. While this fulfills one of Trump’s major campaign promises, it does come with risks. Let's say, for a moment, that the United States gets a bad deal or ultimately walks away from the agreement altogether — then what? One thing is for sure: China would be thrilled.

NAFTA was negotiated in large part to create an integrated North American economy that could compete with China. Recognizing the flood of cheap goods coming from Asia, policymakers on both sides of the aisle understood the need in the early 1990s to take decisive action. The answer was a trade agreement between Canada, Mexico, and the United States that would harness the strengths of all three economies to make U.S. goods more competitive.

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Although NAFTA lowered — and in some cases reduced to zero — tariffs between all three countries, it also instituted strict rules of origin that prevented cheaper goods originating in Asia from taking advantage of these lower tariffs. Before NAFTA, parts and components would enter Mexico from Asia to be assembled in what were appropriately called “screwdriver operations” — operations that merely assembled or added small finishing touches on goods which mostly originated in China. NAFTA curbed this “loophole” significantly by requiring a certain percentage of the value of any good qualifying for the reduced NAFTA tariff come from Canada, Mexico, or the United States.

 

As a result of NAFTA, high-value goods are often produced in the United States before being delivered duty-free to Mexico for assembly and finishing. They are then sent back to the United States and elsewhere around the world for sale. American producers of these goods thus reap huge gains that otherwise would have been lost to China and elsewhere in Asia. While NAFTA did not put an end to an influx of cheap goods from Asia, it certainly helped to hold back the proverbial floodwaters.

To this end, it should be understood that while some American companies did move operations to Mexico after NAFTA, many of these companies would have likely been forced to either close or relocate to Asia in the absence of NAFTA — where, of course, it would have been difficult for Americans to sell intermediate goods.

Recognizing the value of regional trade agreements and seeking to compete with the economic powerhouse that NAFTA created, China has in recent years focused its attention on a regional trade agreement — its own version of the now defunct Trans-Pacific Partnership (TPP) known as the Regional Comprehensive Economic Partnership (RCEP). The RCEP would create a trade agreement between sixteen Asian countries that would reap for China several of the benefits that NAFTA has reaped for the United States. Many of the countries considering RCEP would have been partners with the United States had the TPP gone through.

Add to this China's “One Belt, One Road” initiative, better known as the New Silk Road Project. China is preparing to spend $1.3 trillion in infrastructure projects under its auspices in an effort to sow goodwill and reduce trade barriers between China and Europe. If successful, this would allow China to vastly expand its supply chain across as many as 60 countries that have already expressed interest in joining the initiative.

Beyond China's efforts to foster ties with Asia, they are also working to build trade alliances in the Western Hemisphere, including funding the anti-NAFTA socialist and presidential candidate, Andrés Manuel López Obrador. Obrador is currently leading in polls ahead of the 2018 Mexican election.

Peter Navarro, head of President Trump's National Trade Council, recognizes the importance of NAFTA's role in balancing China. Last week Navarro expressed the importance of NAFTA as a counterweight to China, highlighting rules of origin, saying, “We have a tremendous opportunity, with Mexico in particular, to use higher rules of origin to develop a mutually beneficial regional powerhouse where workers and manufacturers on both sides of the border will benefit enormously.” Navarro is spot-on that the preservation and strengthening of NAFTA will only bolster U.S. economic power vis-à-vis China.

Luckily it seems the Trump administration's focus as of late has been on renegotiation rather than withdrawal. The president recognizes the tremendous role that NAFTA has played in keeping the U.S. economy strong despite an onslaught of cheap goods from China. The hope now seems to be for a better, stronger NAFTA.

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.