Poison Pills Could End NAFTA, Put Carolinas at Risk

President Trump has threatened to pull the United States out of the North American Free Trade Agreement at every turn, but after five empty rounds of NAFTA negotiations, the bullet is in the chamber.

Of Great Import is back online and just in time. The past year under President Trump has been a whirlwind news cycle on trade.

First, he withdraws from the Trans-Pacific Partnership (TPP);


then, he threatens to terminate the North American Free Trade Agreement (NAFTA) . . .

and the US-Korea Free Trade Agreement (KORUS FTA),

only to then decide to try to renegotiate both agreements.

Oh, and do not forget the first two Special 201 cases to be brought in the past 16 years: both have been brought in the first year of the Trump administration. (And, both of which will cost Carolinians their jobs - solar / washers.)

But, after five rounds of NAFTA negotiations, termination of the agreement appears more and more a realistic possibility.

As Politico reports, six pro-trade senators, including South Carolina Senator Lindsey Graham, left a meeting with President Trump on Tuesday, at which they voiced their concerns regarding the future of negotiations, feeling hesitantly optimistic. Nevertheless, Mexico’s Ambassador to the United States, Gerónimo Gutiérrez, recently put odds of termination at 50-50, rightfully suggesting that the Trump administration’s “poison pill” might prove too big for Canada and Mexico to swallow.

Little to no headway has been made through five rounds of negotiations, and a series of unprecedented proposals made by the United States have been largely to blame. A NAFTA modernization agreement, one that includes provisions liberalizing e-commerce and trade in services, strengthening rules for state-owned enterprises, and enhancing regulatory cooperation and trade facilitation, should have been easy for all three countries to agree on. They agreed, more or less, to such terms just over a year ago, as part of the Trans-Pacific Partnership. Why, then, have talks stalled? The U.S. negotiating team has proposed, as part of its agenda to “rebalance” trade flows between the three countries, several items which are non starters for both Canada and Mexico. These include a five year “sunset” provision for the agreement, stricter rules of origin for automotives, and the removal of certain dispute settlement mechanisms.

A sunset provision requiring that each country reauthorize the agreement every five years (presumably meaning a vote on the agreement in Congress every five years - Yikes!) would greatly deter long-term supply chain investment in North America. Justifiably, both Canada and Mexico are vehemently opposed to this proposal. Drawing similar criticism to the “sunset” proposal are changes to rules of origin requirements on automotives. Auto manufacturers in Canada, Mexico, and the United States have all voiced clear opposition to upping these rules. Doing so would create a lose-lose scenario for carmakers, left to choose between either drastically increasing production costs to meet an absurd 50 percent U.S. content requirement or paying a steep tariff. Lastly, on dispute settlement, even while free traders may disagree on the merits of the current system, Canada has drawn a clear line, going so far as to suggest it would rather walk away from the negotiating table than consider removal of Chapter 19 dispute settlement.

Canada says it could step away if the U.S. persists on dispute settlement changes. Mexico seems content to see how the termination process plays out. President Trump has threatened termination at every turn, so perhaps, after five rounds without any real progress, his North American counterparts are finally ready to call his bluff. Perhaps that is what the President wants. If so, he will be making a grave mistake.

Modernizing NAFTA to include provisions on e-commerce, trade in services, state-owned enterprises, regulatory cooperation, and trade facilitation would be positive for Canada, Mexico, and the United States. Attempts to “fix” the trade deficit with Mexico, meaning to protect certain U.S. industries, or termination of the agreement altogether, will do just the opposite. Any gains Americans would see from pending tax cuts will be lost if the United States does not remain a party to NAFTA.

Leaving NAFTA would be particularly damaging for the Carolinas, who both have significant trade ties with America’s neighbors to the north and south. Canada and Mexico are the top destinations for North Carolina’s exports and rank behind only China in terms of imports into the state. Likewise, Canada and Mexico rank in the top five of exports from and imports to South Carolina. Nearly 10,000 South Carolinians are employed by Canadian-owned firms. In fact, the U.S. Chamber of Commerce ranks North Carolina as the 12th most vulnerable state in the event of NAFTA termination.

If Members of Congress have the President’s ear, they would be wise to advise against the administration’s “poison pill” proposals and against threats to terminate the agreement. The way to put America first is to expand, not contract, its ties to the rest of world, especially its closest neighbors. Doing so would make all three countries better off. Rather than terminate NAFTA, the administration should be advised to seek an agreement that reflects the realities of the 21st century in a way that can be beneficial for everyone in North America.

 

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