Compromise key to successful NAFTA renegotiation
First, the U.S. should drop its ill-advised “national security” tariffs against Mexican and Canadian steel. Our NAFTA partners pose no national security threat to the U.S. Once we levied our tariffs, Mexico and Canada responded in kind with entirely predictable targeted retaliation against a variety of American exports — ensnaring unrelated industries into a tit-for-tat. This self-inflicted wound has set a dour mood between the U.S. and its North American partners. Mexico and Canada will withdraw their tariffs as soon as the U.S. withdraws its tariffs.
Second, NAFTA should remain a trilateral deal and all three countries should be in every discussion. President Trump has suggested breaking up the agreement into separate bilateral deals, as evidenced by the fact that delegations from the U.S. and Mexico will meet in Washington to discuss NAFTA. Canadian Foreign Affairs Minister Chrystia Freeland, slated to be in Singapore this week, had offered to come to Washington but was rebuffed by the Trump administration. This is a mistake and a breach of trust. Separate negotiations are a non-starter in Mexico City, Ottawa, and in Congress. American businesses and consumers benefit from the common set of trade rules that exist between the countries.
Likewise, the U.S. should drop its demands to remove Investor-State Dispute Settlement from the agreement. ISDS provides a neutral arbitration forum to resolve disputes between private investors and governments. Politically and legally, removing ISDS is a mistake. It enjoys overwhelming bipartisan support in Congress and in the business community, which is always a necessary voice for passing trade agreements. Likewise, Trade Promotion Authority prescribes negotiating positions for the executive branch in trade negotiations and provides for expedited consideration of trade agreements in Congress. TPA is binding and the 2015 version, which was just renewed July 1 for another three years, requires trade negotiators to pursue ISDS-like processes in trade agreements.
The free traders’ criticism of ISDS is not without merit, but NAFTA has had ISDS procedures since its inception and private firms have made significant investments relying on the certainty that procedure is available in the event of, say, expropriation of property. A healthy debate over the inclusion of ISDS in future trade agreements is worthwhile, but removing it from NAFTA midstream is a mistake.
Canada, too, can make simple concessions that would pave the way for a quick resolution of NAFTA 2.0. The Justin Trudeau government should offer to increase its de minimis threshold, which is the value below which goods can be shipped into the country without paying duties or without exporters having to fill out complicated and time-consuming customs forms.
Low DMTs pose considerable barriers to trade for small businesses, in particular. Canada’s DMT is currently $20 Canadian, or about $15 U.S., one of the lowest in the industrialized world. Meanwhile, the U.S.’s DMT is $800, one of the highest in the world. Upping Canada’s DMT would pave the way for growth in small businesses exporting to Canada. Canada has resisted previous calls to increase its DMT because it levies a value-added tax and is dependent on the revenue, but this position is increasingly untenable.
As the nature of commerce changes, online platforms have made selling goods into foreign markets easier than ever before, particularly for small e-businesses. Likewise, in 2017, Canada’s auditor-general found the country spends more to collect duties on items valued under C$200 than it collects from the duties themselves, which confirms previous independent research.
Despite the irresponsible and misleading rhetoric about NAFTA, the agreement has worked well for the U.S., Mexico, and Canada. The first iteration was not perfect and nor will the revamped version be perfect. It is time for compromise. Salvaging an imperfect but good deal is worthwhile.
