Three ways trump should fix NAFTA in renegotiations

Author: Jacob Dubbert - March 7, 2018 - Updated: March 6, 2018

Jacob Dubbert

“NAFTA is the worst trade deal maybe ever signed anywhere,” candidate Donald Trump proclaimed, “but certainly ever signed in this country.” That was during the first presidential debate.  Later, then-candidate Trump tweeted, “I will renegotiate NAFTA. If I can’t make a great deal, we’re going to tear it up.”

Now, over one year into his presidency, Trump is fulfilling his promise to negotiate a new North American Free Trade Agreement (NAFTA) for the American people. The stated goal is to reinvigorate American manufacturing and to create more jobs. The persistent trade deficit the U.S. has with Canada and Mexico, he argues, is “proof” that the U.S. is getting shafted by other countries. To fix this, NAFTA needs to be renegotiated to reflect a fairer deal for America and to balance the trade deficit. Yet the way Trump is going about the renegotiation is misguided.

Despite the focus on the persistent U.S. trade deficit, it’s not really an issue. The U.S. has low savings rates and consumes more than it produces, thereby importing more than it exports. This is okay because we receive vital foreign investment to fund the trade deficit and expand our economy.

Even more, using NAFTA to level the playing field with protectionist measures such as tariffs will do little to solve the problem. The bilateral trade deficit with Mexico could be improved, but this will only change the composition of the global trade deficit, not its size. Ultimately, tariffs will only serve to hinder efficiency and increase the price of important inputs for businesses, decreasing overall trade flows in the region and leading to higher prices for consumers.

The outcome of NAFTA renegotiation is incredibly important, as it could reshape the entire U.S. economy. Canada and Mexico are our largest trading partners, ranked 1st and 2nd respectively for total U.S. exports, and NAFTA is largely responsible for this. Trade among the region has almost quadrupled since NAFTA’s implementation, increasing from approximately $290 billion in 1993 to almost $1.1 trillion in 2016, and according to the U.S. Chamber of Commerce, almost 14 million jobs depend on trade with Canada and Mexico. Any actions to restrict trade and investment would put all of this in jeopardy.

The talks of renegotiation provide a valuable opportunity to again make NAFTA a state-of-the-art trade agreement. Instead of injecting protectionist ideals into the agreement, the renegotiation of NAFTA needs to further strengthen the regional, integrated economy it has created, while reflecting developments in the 21st century. Although the renegotiation encompasses many changes, Millennial Policy Center President Jimmy Sengenberger and I address three important ways to achieve this in our recent policy paper.

Instead of injecting protectionist ideals into the agreement, the renegotiation of NAFTA needs to further strengthen the regional, integrated economy it has created, while reflecting developments in the 21st century.

First, rules to liberalize the digital economy among the NAFTA countries need to be incorporated into the agreement. Today, digital trade and e-commerce are a vital component of the global economy — a sector that hardly existed in 1993. Allowing digital commerce to flow freely would significantly benefit companies that rely on the internet and would bolster America’s dominating position in digital trade — one that contributes 6 percent of GDP and provides nearly 3 million American jobs.

Second, government procurement needs to remain open to competition, continuing to give Canada and Mexico equal access to U.S. government contracts. The Trump administration wants to scrap this part of NAFTA and add a “Buy America” provision, giving U.S. companies preferential treatment to federal contracts. Much like the existing “Buy America” policies, this would ultimately hinder competition and efficiency, leading to fewer jobs and higher costs for U.S. taxpayers.

Third, to adjust to ongoing developments in the constantly changing world today, a commitment to reevaluate NAFTA every five years should be established. This will help to constantly modernize the agreement to address aspects that could be modified and improved. Rather than the “Sunset Clause” proposed by the U.S., which would induce uncertainty into the investment environment, this would give investors peace of mind about their long-term investments.

NAFTA tremendously benefits the U.S. by improving access to foreign markets and promoting competition for the benefit of Amercian consumers. It embraces the principles of free trade and free markets – ideals that have been the bedrock for America’s success and prosperity. Let’s just hope Trump begins to notice and charts the right course.

Jacob Dubbert

Jacob Dubbert

Jacob Dubbert is a research assistant at the Millennial Policy Center in Denver. He is also a masters candidate in global finance, trade and economic integration at the University of Denver.