PIIE: NAFTA Doesn’t Need a Senseless Sunset





The Trump administration wants a revised North American Free Trade Agreement (NAFTA) to include a sunset provision terminating the pact after five years unless all three countries approve its renewal. Such a clause would insert a fixed expiration date for NAFTA and require positive and politically fraught decisions to maintain tariff-free access to the three markets.

Sunset clauses have never been included in US trade agreements for the simple reason that they undercut the basic economic benefits of the deal. The added uncertainty over the future policy outlook in North America, and the threat of revived US import restrictions and higher tariffs against US exports, would discourage investment and dampen growth prospects in all three countries. The Trump administration’s sunset proposal is senseless … and unnecessary.

Flaws in trade pacts, whether due to negotiating error or changes in market conditions, can be remedied by NAFTA’s amendment procedures or termination clauses. Because the former can be difficult and time-consuming, and the latter drastic and disruptive to output and employment in each partner country, NAFTA also contains provisions that delegate powers to the trade ministers—meeting together as the NAFTA Free Trade Commission—to interpret or modify specific rules or obligations of the pact. Over the past 23 years, NAFTA trade ministers have done so both to narrow the application of investor-state dispute settlement provisions and to modify industry-specific rules of origin to support North American production and trade.

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