Let me start by saying I think NAFTA should be improved, not scuttled. I’ve long advocated for updated rules of the road for international trade, but roads need rules, just better ones, where “better” means rebalancing workers’ and investors’ rights.
That said, the reporting on the renegotiation process, now in round 4, has sometimes exaggerated potential tariff impacts, and has said too little about (a) changes worth making to the two-decade-old agreement, and (b) the political and economic costs of maintaining the status quo.
First, should the renegotiation fail and the United States pull out of NAFTA, tariffs would rise and, again, let me be unequivocal: That should be avoided. The smooth functioning of a North American trading bloc would be facilitated by an agreement, though not just any agreement. But here’s what I haven’t seen reported much, if at all: If NAFTA were to unravel, tariffs would be set by the World Trade Organization’s Most Favored Nation (MFN) rules.
But let’s look at some of these tariffs that would prevail. Our two biggest agricultural exports to Mexico are corn and soybeans. According to Lori Wallach, with whom I’ve written on these issues, under the WTO’s actual, or “applied,” MFN tariff rates, over 90 percent of corn and 70 percent of soybeans would still be traded duty-free. Now, the MFN tariff rates on different agricultural goods jump around. Frozen pork carcasses face 20 percent; smoked pork bellies face 10 percent. If you’re thinking this is pretty arbitrary and unnecessarily complex, I agree, which is another reason to mend, not end, the agreement.
But if you consider the trade-weighted, applied MFN tariff levels based on current trade flows between the three NAFTA signatories, the average tariffs without NAFTA are 2.7 percent for the United States, 4.6 percent for Mexico and 2.4 percent for Canada (higher for ag; lower for non-ag, the latter of which dominates the flows). That’s not duty-free, I grant you, nor is it a desirable outcome. But it’s not a disaster either, and those rates are much smaller than many you see reported.
Next, the status-quo purveyors are out in force, with little recognition that the nation’s views on the downsides of trade have shifted in influential ways. Somehow the election of Trump and the threat of wrongheaded, damaging, populist responses to globalization has failed to enter their consciousness, at least to the point where they’re willing to recognize that some renegotiation on behalf of workers — on all sides of the border — are necessary.
As Wallach describes here, a better NAFTA would include a “major rollback” of the investor dispute settlement mechanism. As it stands, individual corporations can circumvent domestic courts and challenge governments by going before tribunals of three corporate lawyers to demand compensation from a host country’s taxpayers for alleged breaches of investor protections. It would include tighter rules of origin (so countries outside the pact don’t get special treatment), much better enforcement of labor standards and a five-year, mandatory review to check the progress on these improvements.
Though I understand the uncertainty that the review period could inject, I think it’s worth it as it adds what’s been lacking the most from the trade agreements crafted over the past few decades (really, the past few centuries): transparency and good, old-fashioned democratic accountability. This mattered less when the downsides of globalization were less clear, before the relentless pressure of persistent trade deficits on communities built around manufacturing were so acutely felt. For years, establishment politicians on both sides of the aisle could ignore those pressures with impunity. They can no longer do so, and the NAFTA renegotiation presents us with a real-time test of whether the system recognizes that reality, or remains in denial.
Of course, failure to renew the agreement is a risk, but so is the status quo. For those who disagree about status-quo risks, look around. Do you like what you see in American politics today? Me neither, and one reason for that is the elites’ unwillingness to contemplate a more progressive trading regime.