The Trump administration rightly wants to make sure that the North American Free Trade Agreement (NAFTA) works for ordinary Americans. However, instead of abolishing NAFTA altogether, the Trump administration should focus on reforming it to serve better the interests of American workers and companies.
In an effort to reduce the U.S. trade deficit of $566 billion, Washington is currently reevaluating its membership of NAFTA and its terms and provisions. While the United States enjoys a trade surplus of $12.1 billion with Canada, it has a trade deficit of $63.2 billion with Mexico. Without increasing the national savings rate, it is unlikely that the United States will be able to reduce its overall trade deficit in any meaningful way. For instance, instead of importing cheap goods from Mexico, American consumers can simply buy them from El Salvador or Thailand. This means that, without substantial reforms to increase the savings rate, simply eliminating NAFTA is unlikely to reduce the trade deficit. Nevertheless, as Washington, Ottawa, and Mexico City discusses NAFTA, the Trump administration has an opportunity to reform the 24-year NAFTA to America’s economic benefit.
U.S. policymakers should recognize that while the United States needs NAFTA, Canada and Mexico require it more—which gives Washington a marked advantage in negotiations. Mexico is particularly dependent on its trade with the United States: 80 percent of Mexico’s exports go to the United States. The United States is also the most important destination for Canada’s exports, especially its energy sector, which accounts for 7 percent of Canada’s economy.
Withdrawing from the agreement altogether is likely to backfire in the long term. Mexico is in the process of reforming its 17-year trade agreement with the European Union and striking new trade agreements with China and other Latin American nations. Washington’s withdrawal from a free-trade arrangement will push Canada and Mexico to seek stronger trading relations with China, Russia, and countries in the Middle East. Such withdrawal will especially benefit Beijing, which has recently bolstered its efforts to enhance its diplomatic and economic presence in America’s geostrategic backyard.
Instead, Washington should stay in NAFTA but introduce critical reforms to benefit American workers and businesses. At a minimum, such improvements should include introducing new sectors, improving labor and environmental standards, and adding more countries to the agreement.
By reforming NAFTA, the Trump administration can reduce tariff and technological barriers to digital trade and protect American intellectual rights. When NAFTA was first signed into effect in 1994, the internet economy was at its infancy. In fact, the World Wide Web had entered public domain only several months before ratifying NAFTA. Since then, the digital economy has become a significant source of America’s comparative advantage and its economy, now accounting for 6.0 percent of the U.S. economy.
Recognizing the importance of such free trade promoting reforms, the technology sector is helping lead NAFTA lobbying efforts. Many of these technology companies want a reformed agreement to eliminate all tariffs on a broad range of internet services and goods, including computers, smartphones, and medical devices, like NAFTA does for a range of other goods and services. To this end, the Trump administration must pressure Mexico into signing the World Trade Organization’s Information Technology Agreement, which aims to remove all tariffs and taxes on technology-based goods and services.
In addition to including new technology sectors, a revised NAFTA must improve labor and environmental standards. Such improvements can include strengthening enforcement against human trafficking and child labor, as well as enforcing bans on illegal logging and trade in endangered species. While such measures are intended to raise the labor and environmental standards, they will have two additional benefits for Washington. First, raising production standards would increase Mexico’s labor costs and help placate protectionist interest groups. Second, such measures will help garner support from Ottawa, which views improved labor and environmental standards as its key negotiations objectives.
But Washington could even go one step further—by including more countries in NAFTA. Although the Trump administration is disinclined towards multilateral institutions like the United Nations, a NAFTA with more nations would accord the United States a multilateral framework with clear American leadership. One obvious candidate for membership is the United Kingdom, with which President Trump wants to sign a “great” trade deal.
Twenty-four years after the signing of NAFTA, it is now time for modernizing the agreement to reflect the changing nature of the global economy and U.S. trade with Canada and Mexico. The Trump administration rightly wants to protect the interests of American businesses and workers. The best way to do that is through reforms, not by pushing Mexico and Canada to seek stronger trade and diplomatic relations with America’s economic rivals.