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Upgrade with a dab of TPP may be U.S. recipe for NAFTA revamp

[July 15, 2017] By Lesley Wroughton

WASHINGTON (Reuters) - Some provisions of the Trans-Pacific Partnership President Donald Trump quit as part of his pledge to protect American workers from "bad trade deals" may still serve to shape a revised NAFTA trade pact, U.S. officials and trade experts say.

Trump threatened to ditch the 1994 North American Free Trade Agreement too, but eventually decided to renegotiate the pact in talks with Mexico and Canada due to begin in mid-August.

On Monday U.S. Trade Representative Robert Lighthizer will offer first insights into the administration's strategy when he presents Congress its objectives for the NAFTA negotiations.

Several U.S. administration officials, speaking on condition of anonymity, said the Lighthizer will outline plans for updating NAFTA rather than seek a major overhaul of the agreement. While the administration has said it hopes to complete NAFTA negotiations by the end of the year, the strategy will not set a timeline, they say.

Thus far, the Trump administration offered few specifics, other than expressing its desire to modernize the pact to account for digital trade that was in its infancy in the early 1990s and to tackle festering issues on labor, environment, intellectual property rights and state-owned enterprises.

Since those areas have already been addressed in the TPP negotiated under Democratic President Barack Obama and agreed by Canada and Mexico, the pact provides a useful template that could help speed up the NAFTA negotiations, U.S. officials say.

They warn, however, that no final decision has been made on using TPP language.

TPP requires members, for example, to allow independent unions, set working hours and safety standards and deter forced labor and has set higher environment standards than any other previous U.S. trade deal.

The pact also set a 70-year copyright term and eight years of patent protection for costly biologic drugs, significantly less than the 12 years applied in the United States.

MORE AMBITIOUS DEAL

Lawmakers from the U.S. industrial heartland particularly want to see enforceable labor standards that would lift Mexico's chronically low wages, which they blame for U.S. factories migrating south of the border.

"A lot of the negotiators were just in the room a few years ago doing this stuff. They know where the bodies are buried," said one business executive with knowledge of NAFTA deliberations.

Some lawmakers want a more ambitious deal than TPP.

"Donald Trump promised to get a better deal than TPP, and Americans are going to be deeply disappointed if he doesn’t follow through on NAFTA negotiations," said Senator Ron Wyden of Oregon, the ranking Democrat on the Senate Finance Committee and an influential voice on trade matters.

In particular, Canada and Mexico should be able to agree to U.S. proposals on digital trade and environment that got watered down in the final TPP text, Wyden told Reuters.

"This is a once-in-a-generation chance to rewrite NAFTA. Trump can’t squander this opportunity."

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Employees work at a wire harness and cable assembly manufacturing company that exports to the U.S., in Ciudad Juarez, Mexico, April 27, 2017. REUTERS/Jose Luis Gonzalez/File Photo

The demands the Trump administration makes in the talks could have far-reaching implications for U.S. trade relations across the globe, with China keen to make inroads with Mexico and Canada if the United States is seen to be pulling back.

One area to watch will be the so-called rules of origin that determine how much regional content a product must have to be exempt from tariffs. U.S. Commerce Secretary Wilbur Ross has frequently said NAFTA needed to tighten those rules to prevent China from using the trade bloc as a tariff-free "back door" to the U.S. market.

Analysts say any U.S. demands for more specifically U.S. rather than broadly North American content for autos or other manufactured goods would be a tough sell, though Mexico has indicated it could be ready for some concessions to strengthen the region's defenses against Asian competition.

Christopher Padilla, former U.S. under secretary for international trade at the U.S. Commerce Department now at IBM, believes that merely "tweaking" the rules of origin would be enough to satisfy Trump's political agenda, but it still may require companies to alter their supply chains.

The clarion call from U.S. business groups in the lead-up to the talks is "do no harm."

U.S. and international companies have invested hundreds of billions of dollars building integrated North American supply networks and Trump rang alarm bells in corporate boardrooms in April when he threatened to terminate the pact.

Trump backed off after a furious lobbying effort, but analysts say he may still choose a "hard exit" if the talks fail to achieve his goal of shrinking the U.S. trade deficit with Mexico.

NAFTA has quadrupled trade between the three countries, surpassing $1 trillion in 2015. Over a decade through to 2010, however, the United States lost nearly 6 million manufacturing jobs, a figure that resonates with Trump. U.S. trade balance with Mexico also swung from a small surplus in 1994 to deficits that have exceeded $60 billion for most of the past decade. (Graphic:http://tmsnrt.rs/2oYClp2)

Fred Bergsten, a senior fellow at the Peterson Institute for International Economics, said the administration would risk derailing the talks if it focused on reducing the trade imbalance with Mexico, like it has threatened to do.

"We're talking about an imbalance of $60 billion and there is no way under the sun that Mexico can eliminate that or even make a big dent in that without doing some really massive uneconomic distortion of trade flows."

(Additional reporting by David Lawder and Jeffrey Dastin; Editing by David Chance and Tomasz Janowski)

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