As negotiations to update the North American Free Trade Agreement (NAFTA) continue, a moment of truth is at hand. While the American business and agriculture community broadly supports modernization of the pact, the Trump administration is pushing a series of proposals — a sunset clause, much more stringent rules of origin, moves to eliminate investor protections, and others — that violate its pledge to “do no harm” in the negotiations.
These proposals threaten the negotiations and NAFTA itself, risking U.S. access to our two largest export markets — with huge economic, political, and national security costs for the U.S.
However, they are also having a big impact globally. The world is watching — and responding by clinching new agreements that reroute trade flows to bypass the United States.
As Chandler Goule, CEO of the National Association of Wheat Growers, recently observed, “President Donald Trump promised farmers a series of bilateral trade agreements … It is time to get past plowing the same fields and start opening ground in new markets… Right now, we are standing around watching the world pass us by on trade agreements.”
Indeed, the U.S. business and agriculture community needs better access to the 95% of the world’s consumers who live outside our borders. President Trump said he would win this access through bilateral agreements rather than multi-country pacts like the Trans-Pacific Partnership (TPP).
But against the backdrop of the Trump administration’s decision to withdraw from the TPP, governments around the globe are now studying the administration’s approach to the NAFTA talks, as well as the U.S.-Korea Free Trade Agreement, with great concern. Politico recently reported:
Japanese officials are expressing growing frustration with the Trump administration’s economic policies, vowing to continue striking trade deals with other countries that undercut U.S. agricultural exports rather than seek a new trade agreement with the United States.
Japanese frustration comes in part “from President Donald Trump’s harsh rhetoric on trade,” and as a result, they are taking a hard pass on engaging in trade talks with Washington.
The first effect is that, by taking an almost entirely defensive approach to trade, America is no longer on offense. The promised bilaterals are not materializing: No Asian economy is close to opening trade negotiations with the United States. And the one country that has expressed interest, Britain, is years away from being able to do so.
The second effect is that the administration’s approach to trade is bringing other nations together in new trade deals — without the U.S. Long-running and difficult negotiations are suddenly being concluded, and America’s trade competitors are gaining substantially better access to key world markets than U.S. farmers, ranchers, workers, and companies enjoy today.
Consider the speed dating and deal signing among major world economies:
1. Canada and Europe
On September 21, the Canada-EU Trade Agreement (CETA) entered into force. It immediately eliminated 98% of tariffs between Canada and the EU, and it opened up substantial new markets for both parties’ agricultural trade.
The pact isn’t really a model — it’s better at eliminating old fashioned tariffs than addressing 21st century issues like digital trade or services — but it certainly puts U.S. industry at a disadvantage to Canadian firms in transatlantic trade. If the U.S. withdraws from NAFTA, U.S. exporters would also be at a disadvantage to EU competitors in the Canadian market.
2. Mexico and Europe
Mexico and the EU are charging ahead in talks to modernize a 2000 free-trade agreement before the end of the year, and the tenor of those talks is vastly more positive than those of the NAFTA. This is part of Mexico’s Plan B: Securing alternative trading partners should the U.S. follow through on its threat to withdraw from NAFTA.
Again, the U.S. has plenty to lose here. For example, the EU is intent on securing duty-free access to the Mexican market for its dairy producers. Meanwhile, if NAFTA collapses, U.S. cheeses would face a 45% Mexican tariff. Similarly steep levies would hit a wide array of U.S. farm products — wheat, beef, chicken, and so on — as well as manufactured goods.
3. Europe and Japan
The EU and Japan this summer reached “political agreement” on a bilateral trade pact whose text is likely to be concluded within months. As with the agreements above, developments in trade relations with the U.S. have given a big push to wrap up a pact that not long ago seemed like it would never be concluded.
Like CETA, it isn’t quite as modern as its authors like to brag — again, negotiators punted on digital trade rules, which undergirds so much of modern business. But it will eliminate 99% of EU and 97% of Japanese tariff lines when fully implemented, which looks pretty attractive to American firms still facing these duties (e.g., the EU’s 10% tariff on autos).
4. The Trans-Pacific Partnership
President Trump may have withdrawn the U.S. from the TPP, but the other 11 countries are making progress toward bringing it into force on their own. Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam are considering bringing the vast majority of the pact into force but suspending application of provisions such as key intellectual property protections that are viewed as priorities pushed in the original talks by Washington.
Canada and Mexico are in the mix: Again, the U.S. remains their top trading partner, but through these efforts, businesses in the two North American countries are poised to secure access to markets in Asia that will be substantially superior to that currently enjoyed by their U.S. competitors. No wonder a recent study concluded that moving ahead with the TPP without the U.S. offers Canada even greater benefits than the original agreement. Beef is one example of a product where Canadian producers would benefit as they could export to Japan and other markets on terms superior to those granted U.S. cattlemen.
It’s clear major economies are beginning to band together and work around the United States, and it’s hard to find fault in that clear-eyed pursuit of their national interests.
In taking this approach to trade generally, with NAFTA as the chief example, the U.S. runs a real risk of being left behind. Without a serious course correction, American farmers and ranchers, manufacturers and services providers, and small, medium-sized and large exporters will pay the price.