With the new North American Free Trade Agreement (NAFTA) negotiations beginning in Washington, D.C. last week, the big question may not just be what a new NAFTA deal includes, but whether it will ultimately clear political hurdles.
Since the United States published its negotiating objectives in July, the anxiety surrounding the forthcoming talks appears to have dissipated, and markets have responded favorably. But now isn’t the time to allow for complacency. Getting the content right for the NAFTA renegotiations will be critically important, but focusing only on the process’ technical portion misses the more fundamental and persistent political risks that still loom large.
The most basic risk is that the NAFTA talks are not merely a technocratic exercise, but a political one. Similar to politicians who came before him, President Donald Trump tapped into the latent pool of American anger toward NAFTA and made the agreement part of his larger message that Americans are getting ripped off on trade.
He ran on promises to renegotiate NAFTA or scrap it altogether if he couldn’t get a better deal. This latter option was Trump’s apparent preference, at least as revealed in January’s leaked transcript of his phone call with Mexican President Enrique Peña Nieto. In their conversation, Trump made it clear that bilateral economic talks were not his favored course of action. He would have instead preferred to erect a border tax and avoid any lengthy meetings.
The proposed Border Adjustment Tax – at least the one that was part of the House’s tax legislation – appears to be dead, but the transcript reveals another significant political risk. It paints a picture of a president who was initially pressured out of his favorite policy option by Senior Advisor Jared Kushner. This situation then repeated itself several months later, when Trump once again appeared ready to pull the plug on NAFTA and members of his Cabinet had to rush to the Oval Office to plead the opposing side. Taken together, it’s clear that the NAFTA negotiations are not taking place at Trump’s request, but rather against his initial wishes and amid his skepticism that they could yield a better outcome than other policy options.
Yet the NAFTA talks could lead to both long-overdue trade improvements and avoid the negative consequences that would come with rupturing the current economic structure. The renegotiation process is set to expand NAFTA’s scope, including integrating the three countries’ energy sectors – which takes place as Mexico is poised to become the U.S.’ largest energy export destination – and creating frameworks for sectors such as e-commerce that didn’t exist when the agreement was first designed in the early ’90s. If today’s negotiators can successfully update the agreement for the 21st century, U.S. businesses will be positioned to better operate in Mexico and Canada and compete globally.
But Trump’s skepticism raises a concern for the negotiations and their outcome. Even if the three countries can come up with a new and improved agreement by early 2018 and agree on a timetable for submission to their respective legislatures – which may also prove to be an obstacle to final approval – it’s not a foregone conclusion that Trump will be convinced by their recommendations.
This risk is further exacerbated since Trump ran on a platform of sweeping changes for American trade, while his administration’s moderate NAFTA negotiating objectives and the extremely short timeline point more toward minor adjustments. In fact, it is hard to imagine how an economic outcome produced in a handful of months would move the economic needle too far in any one direction. The potential for a more status-quo outcome may calm markets, but would it also calm Trump’s instincts to scuttle the deal altogether?
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If a negotiation document leaks to the press or when the negotiators publish the final positions, that’s when coverage will switch from the trade wonks to the politicos. Trade agreements rarely – if ever – make everyone happy, and it will be an even harder sell in today’s more anti-trade political environment. It is possible that upon the talks’ completion, Trump would back his NAFTA negotiating team and declare a win. However, it also seems possible that Trump could receive pushback over a largely unchanged NAFTA and quickly revert back to his earlier positions.
Overall, the NAFTA negotiations have the promise to smooth over rough points in the three-nation economic relationship and lead to a better trading framework, especially if they can address citizens’ concerns and clearly communicate these changes. However, markets and analysts’ fixation on the technical details cannot be decoupled from the politics of NAFTA, and it is on this highly-politicized foundation that the entire renegotiation process so precariously rests.