Trump and NAFTA “modernization”

by Mark S. Langevin

This month the North American Free Trade Agreement “Modernization” negotiations will be launched in Washington, D.C.  United States. President Donald Trump promised to “Make America Great Again” by withdrawing from the Trans-Pacific Partnership (TPP) and renegotiating the terms of NAFTA.

During his inauguration, the new U.S. president declared: "We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs… Protection will lead to great prosperity and strength".

For Trump, the NAFTA “modernization” process will be one of the first tests of his administration. NAFTA was enacted in 1994 to increase trade and investment flows between the three member-states.

According to Eric Miller of the Canadian Global Affairs Institute: "Trade flows among the three countries have grown from US$290 billion in 1993 to US$1.1 trillion in 2016. The U.S. stock of investment in Mexico has grown from US$15 billion to US$100 billion over this period. The Canadian stock investment in the U.S. grew six-fold during this period while the U.S. stock of investment in Canada grew five-fold. All of this trade and investment reshaped supply chains and made the countries mutually dependent as never before”.

While trade and investment flows grew, so did U.S. trade deficits. The U.S. trade deficit with its NAFTA neighbors reached over US$200 billion by 2016. The rising deficit has come with substantial job loss in the United States manufacturing sector.

According to Jeff Faux of the Economic Policy Institute: “Donald Trump’s promise to renegotiate or tear-up the 1994 North American Free Trade Agreement was a major reason why he won the support of working class voters in the Midwestern states that were crucial to his election”.

NAFTA was negotiated by Presidents George Bush, Sr. and Bill Clinton, and supported by both Democrats and Republicans during the course of the most recent administrations of George W. Bush and Barack Obama. The ensuing trade deficits and manufacturing job losses cast a shadow over this trade deal and led all three major candidates for the U.S. presidency in 2016 (Trump, Hillary Clinton and Bernie Sanders) to reject the TPP and promise to “fix” NAFTA. Trump is following through on his promise, but that is not the whole story.

On July 17, 2017 the U.S. Trade Representative (USTR) released its “Summary of Objectives for the NAFTA Renegotiation.” The document summarizes the Trump administration’s negotiating approach across most of the NAFTA disciplines, including dispute settlement. 

Jeff Faux, a critic of Trump and his NAFTA modernization project, argues:“The problem for American workers is not international trade, per se. America has been a trading nation since its beginning. The problem is, rather, the radical new rules for trade imposed by NAFTA—and copied in the myriad trade deals signed by the US ever since—that shifted the benefits of expanding trade to investors and the costs to workers”.

According to Public Citizen, NAFTA unleashed “an explosion of imports from Mexico and Canada that led to a huge new U.S. NAFTA trade deficit. More than 900,000 specific U.S. jobs certified by the U.S. Labor Department as lost to NAFTA offshoring and import floods under just the narrow Trade Adjustment Assistance (TAA) program, which is a significant undercount of NAFTA job loss given the program explicitly excluded many categories of workers during the first decade of NAFTA’s damage and reporting is not mandatory so only those who know about the program and do the work to apply are even considered.”

Along with lost jobs, private sector enterprises from all three member-states were able to pursue lucrative litigation under the dispute settlement provisions of NAFTA as part of the “radical new rules” that concentrate the benefits of free trade to corporations and the losses to workers.

Public Citizen highlights NAFTA’s Investor-State Dispute Settlement (ISDS) and claims that “ISDS gives multinational corporations stunning powers, including the ability to challenge new policies –from Wall Street regulations to climate change protections –if corporations claim these policies violate their NAFTA rights and frustrate the corporations’ “expectations” of how they should be treated.”

Will U.S. President Trump reverse course to renegotiate a NAFTA that rebalances trade while protecting workers and the environment?

The Summary of Objectives document includes major proposed changes in the trade agreement, including the elimination of Chapter 19 that provides for dispute settlement procedures for the implementation of anti-dumping and counter-vailing duty cases among the three members. Accordingly, Trump seeks to take advantage of the controversial nature of NAFTA’s dispute settlement provisions to expand the use of the equally controversial and unilateral U.S. anti-dumping laws that protect U.S. industrial enterprises from foreign competition. The document does not make direct reference to Chapter 11, but most observers argue that Trump seeks elimination of Chapter 19 while retaining investors’ rights to take member-states to court. Expect both Canada and Mexico to reject any U.S. proposals to eliminate Chapter 19 altogether.

The Summary of Objectives also includes guidelines for reforming the trade in services provisions. The NAFTA provisions on trade in services were ambitious and designed to deepen liberalization in the part of the economy that, when NAFTA was negotiated, accounted for almost two-thirds of U.S. Gross Domestic Product (GDP). Chapter 12 treats most of the trade in services provisions, with other chapters focusing on key service sectors such as telecommunications and financial services. Trade in services under NAFTA obligations are based on a negative-list approach. This means that everything is liberalized except what is deliberately excluded by member-states in the original accord.

Trump’s objectives for Chapter 12 include new provisions to further liberalize services across borders.

The U.S. approach proposes: “Where any exceptions from core disciplines are needed, the negotiation, on a negative list basis, of the narrowest possible exceptions with the least possible impact on U.S. firms.”

However, the document also includes a few surprises with respect to the delivery of public services. The Trump government seeks to further define Chapter 15 on State Owned Enterprises and Article 1503 specifically to “Retain the ability to support SOEs engaged in providing domestic public services.” This proposal modestly strengthens the language to recognize the important presence of SOEs in education, health and utilities across all three nations. It is likely that both Canada and Mexico would support such a proposal.

Another surprise, but consistent with Trump’s appeal to manufacturing workers, is the objective of placing the labor and environmental side agreement within the new treaty. 

The document calls for: “Bring the labor provisions into the core of the Agreement rather than in a side agreement.

• Require NAFTA countries to adopt and maintain in their laws and practices the internationally recognized core labor standards as recognized in the ILO Declaration, including:
• Freedom of association and the effective recognition of the right to collective bargaining;
• Elimination of all forms of forced or compulsory labor;
• Effective abolition of child labor and a prohibition on the worst forms of child labor; and
• Elimination of discrimination in respect of employment and occupation.

Require NAFTA countries to have laws governing acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.”

These proposals would strengthen the language of the labor side agreement and feature it within the actual text of NAFTA or its successor treaty. Most importantly, the document also calls for new language to “Ensure that these labor obligations are subject to the same dispute settlement mechanism that applies to other enforceable obligations of the Agreement.”

This proposed modification to NAFTA could strengthen efforts to protect workers and their unions in all three countries, and its inclusion was an essential requirement to pull in the support of the United Auto Workers (UAW) and the AFL-CIO for NAFTA’s renegotiation.

The Summary of Objectives also calls new environmental protection provisions to “Bring the environment provisions into the core of the Agreement rather than in a side agreement…” and “Establish strong and enforceable environment obligations that are subject to the same dispute settlement mechanism that applies to other enforceable obligations of the Agreement”.

Overall, the Trump administration’s NAFTA renegotiating approach appears to favor private enterprise over labor and the environment with the above noted exceptions.

Simon Lester, a trade expert with the conservative CATO Institute, reported that the "New NAFTA may look very similar to the old TPP, although there could be some tweaks here and there".

Doreen Edelman, co-chair of the global business team of the law firm Baker Donelson concluded: "You can say everybody’s objectives are in here. I think the people that wrote the objectives wrote them in a way that will allow everybody to find a win".

Senador Ron Wyden, Democrat from the state of Oregon and opponent of Trump, criticized the document as "hopelessly vague," and said that provisions on topics including the environment looked like "watered down versions of TPP proposals."

President of the AFL-CIO, Richard Trumka responded, responded to the Summary of Objectives text to declare: “NAFTA needs to be fundamentally rewritten, not merely tweaked, and working people are united in our demand to rewrite NAFTA. If the group in Washington refuses to get the job done, American workers will find leaders who will.”

As part of the USTR’s consultations with constituents, Public Services International affiliates from Canada and the United States submitted a public comment on June 12, 2017 to advance our own principles. You can read the submission here.

* Mark S. Lanvegin is PSI`s Subregional Secretary for North America