Trump aiming to make NAFTA like a football game without referees
The business community is broadly supportive of efforts to update and strengthen the North American Free Trade Agreement (NAFTA). NAFTA has been a major success for the United States, as well as our Canadian and Mexican partners.
But it’s now a quarter-century old and lacks rules in important new areas like digital trade, data flows and treatment of state-owned enterprises. A modernization that will bring NAFTA into the 21st century would be a welcome development, provided that it keeps what is already working in the agreement.
Since we are living in an age where the benefits of global economic integration are not well understood or appreciated, it’s worth backing up a bit to ask: What is a free trade agreement (FTA) anyway? Also, why would countries want to enter into an FTA?
The United States currently has FTAs with 20 countries, but other countries around the world have entered into several hundred bilateral and regional FTAs since the end of World War II.
They have done so not to cede sovereignty or export jobs overseas — two of the widely held misconceptions about trade agreements. Rather, they enter into FTAs in order to grow their economies through mutually beneficial cross-border trade and investment.
FTAs historically have provided preferences to the negotiating parties primarily centered around tariff-free trade. More recent trade agreements, including NAFTA, also include provisions on customs and trade facilitation, investment protection, regulatory standards, environment and labor and many other issues.
The key to reaping the benefits of an FTA and ensuring that it benefits U.S. companies, workers and consumers is to enforce the rules of the agreement in the event of a breach. In short, a new NAFTA must be fully enforceable.
Unfortunately, it seems that the Trump administration may want to weaken NAFTA’s core enforcement provisions. Such a change would spell disaster, akin to playing football or any other sport without a referee.
NAFTA currently has three strong chapters that provide for enforcement and redress: Chapter 11, which covers disputes between investors and states; Chapter 19, which covers anti-dumping measures and countervailing duties; and Chapter 20, which covers state-to-state disputes.
The United States has put forth proposals on each of these chapters, ranging from weakening the provision to entirely eliminating the chapter. If all of these proposals were to be included in NAFTA 2.0, there would be no provision available to provide legal recourse to an injured party against the party in breach of any of the substantive provisions.
Simply put, an agreement without enforceability would be bad for business. The Trump administration’s proposal for an “opt-in” approach to NAFTA’s existing dispute resolution mechanisms is no substitute for real, recognized, agreed and enforceable rules in this area.
Without substantive provisions protecting investment, including investor-state dispute settlement (ISDS), it’s very unlikely that the United States would gain the very tangible benefits it gets from open investment among the three NAFTA partners.
ISDS depoliticizes the enforcement of important investment rules by putting the dispute in the realm of neutral and legal arbitration.
U.S. investors, including the many smaller and medium-sized companies that have expanded sales and operations north and south of the border under NAFTA, would be far less willing to do business in Canada or Mexico if those governments couldn’t be held responsible for poor treatment or abuse of power.
The same goes for Canadian or Mexican investors in the United States, who have created many thousands of jobs here at home since NAFTA came into effect.
More broadly, you have to ask yourself: What good is a free trade agreement without enforcement provisions? The law of the Wild West is not the sort of formula needed to govern international trade and investment in today’s complex globalized international economy.
To extend the sports metaphor, the Trump administration seems to be more focused on playing defense than offense, preoccupied with eliminating tried-and-true principles because they impinge on our unilateral ability to block imports, discriminate against foreign products or projects and simply ignore inconvenient rules and regulations.
Historically, under both Republican and Democratic administrations, the United States has played offense. Indeed, we have been the star quarterback of the pro-growth team, leading international efforts to open markets, fight protectionism, promote greater international competition and uphold the rule of law.
A key part of this has been our insistence on strong enforcement provisions, i.e., referees with real whistles and real authority. For the U.S. now to focus on defense while also throwing away the rulebook is truly troubling.
Peter M. Robinson is president and CEO of the United States Council for International Business a business advocacy group that was founded in 1945 to promote free trade and help represent U.S. business in the then-new United Nations.