The US today released a 17-page outline of a "tough negotiating strategy" to revise the 1994 North American Free Trade Agreement, meant to reduce trade imbalances with Mexico and Canada and boost exports of everything from farm goods to financial services while for the first time saying it would seek to deter currency manipulation by trading partners. The outline comes in advance of preparations to kick off heated negotiations to revamp Nafta.
The much anticipated document (press release and link to full document) released by U.S. Trade Representative Robert Lighthizer said the Trump administration aimed to reduce the U.S. trade deficit by improving access for U.S. goods exported to Canada and Mexico and contained the list of negotiating objectives for talks that are expected to begin in one month. Topping Trump’s list is a "simple" objective: “improve the U.S. trade balance and reduce the trade deficit with Nafta countries.” Lighthizer said that the negotiations would begin no earlier than Aug. 16, 2017.
Among other things the document makes the unexpected assertion that no country should manipulate currency exchange to gain an unfair competitive advantage, which according to Citi's economists was the only notable surprise in the entire document:
That line of focus centers on FX: “Through an appropriate mechanism, ensure that the Nafta countries avoid manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage.”
Citi Economics highlighted this as one of the most controversial risks of inclusion in these guidelines. However, it also cited belief that if included in the principles, this issue may need to be addressed separately. Specifically for countries like CAD and MXN.
While Canada and Mexico are not formally considered currency manipulators by the US Treasury, the reference in the list of objectives will likely set a template for future trade deals such as the pending negotiation to modify a 5 year old free trade deal with South Korea, a country in far greater risk of being branded a currency manipulator as it sits on the Treasury's monitoring list for possible signs of currency manipulation.
Specifics aside, the brief position summary offers a glimpse into what a Trump administration trade agenda could look like which until now, Reuters notes, "has been shaped by campaign rhetoric and tweets." Indeed, the demands made by the Trump administration in the NAFTA talks will have far-reaching implications for U.S. trade relations across the globe, especially with China eager to make inroads with Mexico and Canada if the United States is seen to be retreating.
Among the list of general priorities, the administration will seek to eliminate a trade dispute mechanism that has largely prohibited the United States from pursuing anti-dumping and anti-subsidy cases against Canadian and Mexican firms. It also seeks to eliminate a range of non-tariff barriers to U.S. agricultural exports to Canada and Mexico. These include subsidies and unfair pricing structures
USTR said it would seek to strengthen NAFTA's rules of origin to ensure that the pact's benefits do not go to outside countries and to "incentivize" the sourcing of U.S. goods. It offered no details on such incentives and did not specify how much of a product's components must originate from within North America.
Ironically, the topic of trade is one where Trump has found support from both labor union leaders and Democratic lawmakers, both of whom weighed in on the issue early, reminding Trump they expect him to keep 2016 election campaign promises to protect American workers in NAFTA talks (it was not clear if the Democratic lawmakers, or labor unions for that matter voted for Trump). According to Reuters, they stopped short of demanding termination of the 1994 trade pact with Canada and Mexico. Slamming the trade agreement, AFL-CIO president Richard Trumka said NAFTA had been an "unequivocal failure" and should be completely renegotiated. It is safe to say that the 12.5 million mostly democratic members of the labor unions represented by Trump agreed.
"We will do everything we can to make this a good agreement and to hold the president at his word and make sure we get a renegotiation," he told a conference call with reporters. "If it comes out that it is not a good deal, no deal is better than a bad deal," Trumka said.
Seen as a poster child of globalization, NAFTA has quadrupled trade among the three countries, surpassing $1 trillion in 2015 however over the decade stretching 2010 the United States lost nearly 6 million manufacturing jobs. At the same time, the U.S. trade balance with Mexico also swung from a small surplus in 1994 to deficits that have exceeded $60 billion for most of the past decade.
In its primer and preview of "NAFTA 2.0", Citi economist Sergio Luna said that the bank expects "NAFTA to be successfully renegotiated in its current trilateral format even though ratification would take longer (by early 2019)." Citi said that it views the renegotiation process as an opportunity to modernize the agreement, which was a major innovation in global trade when it came into force back in 1994, and expects NAFTA 2.0 to include a digital chapter and other uncontroversial ‘updates’ that were previously agreed upon during the TPP negotiations. That said the bank also expects some “tougher sell” items that could complicate the renegotiations, including stricter rules of origin and changes to the dispute settlement mechanism, a proposal which has made its way into the final draft.
Finally, looking at the three possible outcomes for Nafta ratification, Citi's three scenarios take into account the binding legal timeline the US Administration would face ahead of tight calendar and 2018 elections, and are as follows:
3. The renegotiation process is derailed (10% probability). This outcome might prompt the US to withdraw from NAFTA and negotiate two bilateral agreements.
For a graphic on NAFTA's effects, click here.