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Nafta 2.0: Will the Trump Administration's 'Wish List' Be Granted?

The North American Free Trade Agreement is back on the table. Will the patient survive?

After months of bombast on the campaign trail, President Trump took office vowing to renegotiate Nafta on terms more favorable to the U.S. Since then, he has remained vague as to exactly what he wants to do with the 23-year-old tripartite treaty among the U.S., Canada and Mexico, other than raising the possibility of a border adjustment tax, an idea that is now considered to be dead.

Now, however, the Administration has issued a “wish list” of items that it wants to tackle in the renegotiation of Nafta. It includes updating rules of origin to boost the amount of locally sourced content in products sold within the Nafta region, altering the agreement to address “America’s persistent trade imbalances in North America,” and inserting language that accounts for the growth of digital trade, particularly in financial services, in the years since Nafta’s ratification.

The Administration’s agenda still lacks essential details, but even its broad outline raises questions about whether a new treaty can be crafted in a form that would be acceptable to all parties.

One key aspect of the President’s approach, evident throughout the campaign, centers on his stated desire to reduce the U.S. trade deficit, especially with Mexico. (According to the U.S. Census Bureau, it exceeded $30.3bn for the first five months of 2017.) While the deficit has occupied center stage in the debate over U.S. trade policy for decades, it has not been addressed in a major trade agreement until now, according to Robert Holleyman, chief executive officer and president of C&M International, the international policy and regulatory affairs affiliate of Crowell & Moring LLP.

Holleyman should know. He was U.S. Deputy Trade Representative in the Obama Administration. By raising the deficit issue “upfront and center,” he says, President Trump is proposing a new trade agreement that is “different from what has historically been negotiated by the U.S.”

The President’s novel approach is causing concerns among many economists. “We’re trying to determine how that will play out in the context of the negotiations,” Holleyman says.

Notably missing from the Administration’s position statement is any reference to trade in services, for which the U.S. ran a $7.6bn surplus with Mexico in 2016, according to the Office of the Trade Representative. And the combined U.S. goods and services trade surplus with Canada was $12.5bn in that same year. Neither Mexico and Canada will tolerate the U.S. remaining silent on its surpluses in any Nafta renegotiation. What’s more, the debate could end up pitting the U.S. goods and services sectors against one another. “It’s a very thorny problem,” Holleyman says.

A trade deficit is neither inherently good nor bad, he adds. “It depends on what’s causing it.” The U.S. trade deficit with China is largely a result of import restrictions imposed by the Chinese government, but other shortfalls might simply be a reflection of the economic circumstances of the countries in question.

The wish list’s emphasis on local content isn’t new; it’s among the founding principles of Nafta. But the Administration appears convinced that the treaty’s existing language isn’t adequate to ensure the highest possible degree of North American-sourced content. “They don’t specify what changes they want,” says Holleyman, “but they do talk about the fact it needs to be reviewed carefully.”

The topic of digital trade is one area on which all sides might agree about the need for an updated Nafta. The flow of digital data was “quite nascent” at the time the treaty was negotiated, and there were no sections related to cross-border trade in data flows. Negotiators seeking guidance on the issue might look to the provisions that were placed in the 12-nation Trans-Pacific Partnership — before the Trump Administration withdrew from the agreement.

Holleyman is optimistic that language on digital trade will be included in a revised Nafta. For example, it’s likely to bar customs duties on digital products as they cross borders, and ensure equal treatment for digital products arising from any of the three signatories. Additionally, Nafta countries would be urged to “refrain” from imposing measures requiring the use of local computing facilities for financial services, while prohibiting outright such requirements for all other industries. The distinction recognizes that federal and state financial regulators might want to retain the authority to require that certain records be held in the U.S., Holleyman says.

Regardless of Trump’s ultimate distaste for TPP, the Administration is likely to use that agreement’s “Digital 2 Dozen,” a listing of the priorities for establishing a free-flowing digital economy, as a model for addressing the issue in a modernized Nafta. The initial Nafta wish list doesn’t include all 24 points, “but there’s a high level of confidence that in the final negotiations [it] will,” Holleyman says.

Of course, any renegotiation of Nafta would have to include “wish lists” from Canada and Mexico as well, and they are unlikely to track point for point with that of the U.S. Contrary to the Administration’s apparent position, both countries have made it clear that they don’t necessarily subscribe to the notion of using the TPP as a starting point for renegotiation. They will want to start from scratch, possibly walking back some of the hard-won commitments made under TPP. Such a stance would ensure a long, arduous process of renegotiation.

The Administration has said it would like to bring the negotiations to a conclusion in about six months. Holleyman believes that timeline to be unrealistic. “Most observers think it will probably take more than that,” he says, notwithstanding the progress achieved during the TPP discussions. Seeking a quick and easy path to a “modernized” Nafta, the Trump Administration could end up getting more — and less — than it bargained for.

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