Trump's NAFTA revamp would require concessions, may borrow from TPP

[November 22, 2016]  By David Lawder

WASHINGTON (Reuters) - President-elect Donald Trump's plan to renegotiate the North American Free Trade Agreement (NAFTA) to make it "a lot better" for U.S. workers would not be a one-way street for his administration, as Canada and Mexico prepare their own list of demands that could require difficult U.S. concessions.

The 22-year-old NAFTA and other trade deals became lightning rods for voter anger in the U.S. industrial heartland states that swept Trump to power this month.

Trump -- who on Monday vowed to file notice of his intent to quit an Asia-Pacific trade deal on his first day in office -- has pledged to leave NAFTA if it can't be improved to his liking. But he has said little about what improvements he wants, apart from halting the migration of U.S. factories and jobs to Mexico.

Trade experts, academics and government officials say Canada and Mexico would also seek tough concessions and that NAFTA's zero-tariff rate would be extremely difficult to alter. And any renegotiation would likely take several years.

"In a renegotiation, one side can come in with requests, but the other side is going to expect concessions," said Wendy Cutler, a former deputy U.S. Trade Representative (USTR). "We need to know what we're going to ask for and what we can give."

When Cutler helped renegotiate a stalled trade deal with South Korea in 2010, USTR won concessions for U.S. automakers, but at the expense of a longer phase-out on steep Korean pork tariffs and allowing Korea to largely maintain a health care reimbursement system that favors domestic generic drugmakers.

Trump, who during the campaign called NAFTA the "worst trade deal ever" and threatened to levy a 35-percent tariff on Mexican-assembled autos and other goods, would have a hard time raising U.S. tariffs without scrapping the agreement, trade experts say.

"There is no precedent in free trade negotiations for one side raising tariffs more than the other," said Chad Bown, a senior fellow at the Peterson Institute of International Economics in Washington.

"If U.S. workers are more expensive than Mexican workers, the only way to level the playing field is to do things that raise costs in Mexico," Bown said.

Negotiating stronger environmental and labor protections would be one way of doing this, as it would increase manufacturing costs in a lower-income country like Mexico.

The Trump transition leader for trade, Dan Dimicco, declined Reuters' requests for comment. DiMicco, who is under consideration to be Trump's top trade negotiator, is a former chief executive of steel giant Nucor Corp. who has long fought for protections against unfairly traded imports.

In a YouTube video message published on Monday, Trump vowed to quit the Trans-Pacific Partnership (TPP), a proposed 12-country Pacific-rim trade bloc. Although the TPP terms were settled more than a year ago, the pact was never taken up by U.S. Republican leaders in Congress due in part to anti-free-trade rhetoric in the presidential campaign.

Calling it a “a potential disaster for our country", Trump said his administration would instead negotiate "fair, bilateral trade deals that bring jobs and industry back onto American shores.”

His comments would appear to snuff out any hopes among other TPP countries that the pact championed by President Barack Obama could be revived under the new administration.

Mexican President Enrique Pena Nieto said at a Pacific Rim summit on Saturday that he would be willing to discuss NAFTA with Trump to "modernize" the treaty -- but not renegotiate existing provisions.

He said that modernization could include adding environmental, labor and other provisions that weren't contemplated when NAFTA was being negotiated in the early 1990s.

Canadian Prime Minister Justin Trudeau, who met with Pena Nieto on the APEC sidelines, said he was "keeping our options open" on trade discussions with the U.S. president-elect.

But if NAFTA is reopened, Canada will insist that any renegotiation bring an end to a decades-old dispute over Canadian exports of softwood lumber, said David MacNaughton, Canada’s ambassador to the United States.

Trucks wait in a queue for border customs control to cross into U.S. at the World Trade Bridge in Nuevo Laredo, Mexico, November 2, 2016. REUTERS/Daniel Becerril

U.S. producers claim the Canadian wood is unfairly subsidized because it comes from federal lands and have threatened to seek billions of dollars in tariffs, which Canadian officials say would make a "mockery" of free trade.

For Mexico's part, any concessions that would favor U.S. industrial goods could be met with demands to increase U.S. import quotas for Mexican sugar and protections for Mexico's potato crop.

And both Mexico and Canada would likely demand greater access to compete for U.S. public sector procurements, now largely protected by "Buy America" laws. A major Trump administration infrastructure spending program would make this a more enticing target, Cutler said.

BORROWING FROM TPP?

Since NAFTA was enacted, total U.S. trade with Canada and Mexico has quadrupled to $1.3 trillion a year, but the U.S. combined goods trade deficit with Canada and Mexico has grown from $9.1 billion in 1993 to $76.2 billion in 2015.

(Graphic showing trend in U.S. trade deficit, imports: http://tmsnrt.rs/2gajLSa)

NAFTA's effect on U.S. jobs is disputed. Critics such as the left-leaning Economic Policy Institute charge that it has led to the loss of some 850,000 U.S. manufacturing jobs, while proponents such as the U.S. Chamber of Commerce claim the trade growth has added a net 5 million jobs in the United States.

The non-partisan Congressional Research Service concluded that NAFTA has had only a small positive effect on U.S. growth, but has helped U.S. manufacturers become more competitive due to more efficient supply chains.

A renegotiated NAFTA could, ironically, end up borrowing key elements from the TPP to stiffen provisions on environment, labor and digital economy standards, trade experts said.

Mexico and Canada have already agreed in the TPP to "fully enforceable" labor and environmental improvements, meaning that punitive duties could be imposed on countries that don't comply -- a major step-up from NAFTA.

TPP also included provisions governing e-commerce and cross-border data flows -- sectors that barely existed as NAFTA was negotiated in the early 1990s -- to better protect intellectual property and ensure a free and open internet. Officials in all three countries say NAFTA needs modernization in this area.

Trump economic advisers Peter Navarro and Wilbur Ross have suggested, however, that the TPP environmental, health and safety standards aren't strong enough.

In an economic white paper and various opinion pieces, Navarro, a University of California-Irvine business professor and Ross, a billionaire private equity investor who is being considered by Trump to lead the Commerce Department, said they want future U.S. trade deals to include "prompt triggers and automatic renegotiation if trade gains are not distributed fairly."

They also want "ironclad sanctions" against currency manipulation, and "zero tolerance" for intellectual property theft.

"In any negotiation or renegotiation, our guiding principle should be this: Enter into a free trade agreement only if it both increases total trade and reduces our trade deficit," they wrote.

(Additional reporting by David Ljunggren in Ottawa, Dave Graham in Mexico City and Nick Carey in Chicago; editing by Stuart Grudgings)

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