NAFTA's Greatest Strengths Are What Donald Trump Dislikes
Signals from the Trump Administration indicate it may be getting serious about the possibility of seeking separate bilateral agreements with Canada and Mexico rather than trying to complete a revised three-party NAFTA. The argument for a pair of bilateral agreements is the wide differences among the three NAFTA countries. But that is the biggest advantage of NAFTA – it brings together economies with different strengths, allowing each country to make up for its own economic weaknesses.
President Trump has been indicating a preference for bilateral agreements over regional agreements for over a year. In March, U.S. Trade Representative Robert Lighthizer raised the possibility that the United States might prefer bilateral agreements. But the issue gained steam last week, when National Economic Council director Larry Kudlow said Trump had asked him to express a preference for separate negotiations. “Canada is a different country than Mexico”, Kudlow said. “ They have different problems ...”
But that is the biggest advantage of a regional agreement like NAFTA. It brings together countries with different economic strengths and weaknesses, allowing another country’s strength to compensate for your own weakness in some areas. Americans and Canadians earn high wages, making some activities simply uneconomic for them. Mexico, on the other hand, has a larger supply of lower-paid labor. Mexico may lack the skills base or infrastructure to compete in some areas. The United States and Canada can compensate for that. Trade deals are meant to bring together different countries, with different strengths and weaknesses. To say that is too difficult to attempt is to say that free trade is too difficult to attempt.
There are in fact some factors that make bilateral agreements more attractive. Because they involve fewer countries, and usually fewer kinds of economies, they are easier and quicker to conclude. Because of similarities in interests and common values, bilateral agreements can cover a wider range of areas, such as technical standards, labor standards, and environmental regulations. However, bilateral agreements between two countries do not bring together the wide variety of characteristics that NAFTA can offer. Adam Smith’s principle of the division of labor is best brought to life in a free trade area that includes different countries offering different strengths.
The desire to cast a wider production net is why so many companies – such as IBM and Coca-Cola – conduct some of their manufacturing in Mexico and ship goods back into the United Stets tariff free, allowing them to sell domestically and around the world at a lower price than would otherwise be feasible. The North American auto industry may offer the best example of that. Vehicles cross the borders several times, with different value added at each production facility – U.S., Canadian or Mexican. That is a principal reason that the North American auto industry’s share of global trade has increased over the past 20 years. If you work at an auto or auto parts plant in Michigan or Ohio, your job may be more secure because of parts that can be sourced in Mexico or Canada.
In any event, the Trump Administration would quickly find that in this case, two sets of negotiations are no easier than one. The same U.S. demands that Canada will not accept would also be spurned by Mexico. Both countries oppose several major clauses proposed by the United States, including a procurement policy weighted to the United States, and the notion of a sunset provision that would cause any agreement to expire in five years since both countries want secure, long-term access, as do all major exporters In all three North American countries.
In any event, businesses in all three countries prefer a North American agreement to two separate bilateral agreements for good reasons – it allows them to maintain cross-border supply chains, and it is easier to comply with one agreement rather than two.
NAFTA is working – that’s one of the major reasons the three countries have become more productive than they were a quarter-century ago. While it may need some updating – such as enhanced protection of intellectual property – it should not be torn into two as part of a negotiating whim.
