The latest round of talks has once again triggered charges that President Donald Trump is recklessly threatening to disrupt hundreds of billions of dollars of Western Hemisphere commerce each year by seeking a major rewrite of the North American Free Trade Agreement (NAFTA) — and vowing to pull out if he fails.
Actually, his NAFTA policy is way too timid, specifically about turning the treaty into a powerful region-wide growth and jobs engine by reviving Washington’s original aim of creating a true North American trade bloc.
Despite claims that his NAFTA plans simply reflect selfish “America First” priorities, Trump has consistently urged treaty changes that would benefit Canada and Mexico, too, ever since his August 2016 trip to Mexico City to meet with President Enrique Pena Nieto. Since his election, Trump aides have made clear that their main plan is improving the treaty’s rules of origin.
The idea is keeping trade liberalization’s benefits inside the free trade zone by requiring all goods sold in North America to be manufactured mainly in North America in order to avoid tariffs. By substituting regionally made products for imports of most final products and of their parts, components, and materials, output, employment, and wages would be boosted in all three signatory countries. The key: tariffs on non-North American goods high enough to force their producers to move factories and other facilities to the region or find themselves priced out of its immense markets.
The intent to create such a genuine North American trade bloc, and the belief in its viability, was made clear by NAFTA’s father, Ronald Reagan. Back in 1979, Reagan based his hopes for continent-wide economic integration on confidence that the region boasts “the assets to make it the strongest, most prosperous and self-sufficient area on Earth. Within the borders of this North American continent are the food, resources, technology and undeveloped territory which, properly managed, could dramatically improve the quality of life of all its inhabitants.”
When endorsing NAFTA in 1993, Reagan added a crucial strategic dimension. He wrote that “a powerful bloc to compete in today’s global economy” was vital because Europe and East Asia were creating their own regional “economically self-sufficient” trade arrangements that could “dramatically reduce” their demand for American goods.
And announcing NAFTA’s signing in 1993, President Bill Clinton similarly called the treaty “essential to our long-term ability to compete with Asia and Europe” because “across the globe our competitors are consolidating, creating huge trading blocs.”
NAFTA did condition duty-free treatment on high levels of North American content. But the multinational companies that so powerfully lobbied for the agreement wanted the freedom to source products for sale inside the continent — meaning chiefly the United States — from anywhere in the world, in order to secure the lowest possible production costs and highest profits. Therefore, they made sure that the tariffs needed for effective origin rules stayed low enough to be easily ignored.
The Trump administration has acknowledged NAFTA’s failure on this score and favors raising North American content requirements. But it has mystifyingly proposed no tariff hikes. And it has needlessly antagonized Canada and Mexico by insisting that, within the (toothless) North America-wide rules, new provisions be added requiring 50% U.S. content.
The president should return to his stated goal of North America-wide economic revival by proposing tariffs high enough to bite. If non-North American economies complain that these levies would violate World Trade Organization rules and vow retaliation, Trump and his Canadian and Mexican counterparts should remember the continent’s potential for self-sufficiency — which enables these threats to be ignored.
Trump should also realize that stronger NAFTA labor rights and environmental regulations could enable him to drop the 505 U.S. content requirement without indefinitely exposing American companies and workers to penny-wage, pollution-haven competition from Mexico. Significantly, Canada appears to agree. Mexico in turn could accept these changes because its even lower-cost, less regulated predominantly Asian rivals would be largely excluded from the market.
Big contentious NAFTA issues would remain unresolved, such as dispute resolution and government procurement practices. But with nearly 90% of the continent’s economic output — and buying power — the United States clearly possesses the leverage to prevail. Canada and Mexico would be more than compensated by all the new business generated by the better origin rules.
A new North American trade bloc would enable Trump to keep a campaign promise, expand his political base further into independent and Democratic ranks, and strengthen three national economies by defying conventional wisdom. For a self-styled maverick master deal-maker, what’s not to like?
Alan Tonelson is the founder of RealityChek, a public policy blog. Follow him @AlanTonelson.