Despite being a favourite punching bag for U.S. politicians over the years, the North American Free Trade Agreement (NAFTA) resulted in over 25 years of enhanced productivity and export-driven growth for North America. The U.S. and Mexico are the first and fourth export destinations for Canada, while 48 U.S. states feature Mexico and/or Canada in their top two export destinations. The ability to integrate supply chains across three nations has helped make North America a global powerhouse in auto manufacturing, food processing and other key sectors. While NAFTA’s benefits have long been publicly embraced in Canada, a side benefit of President Trump’s threat to leave NAFTA during its renegotiation was that even vocal NAFTA-skeptics in the United States ended up defending the critical nature of our integrated supply chains.
At their meeting in January, the three North American leaders said they intended “to forge stronger regional supply chains, as well as promote targeted investment” in strategic sectors like semiconductors and batteries. Seeing North America as a competitiveness zone — one that helps producers in all three nations meet or beat foreign competition — is why we did NAFTA in the first place. But it has taken a resurgence of great-power competition, this time with China, to make the United States fully appreciate the benefits of integration with its neighbours, so much so that Mexico and Canada receive preferential treatment under the Inflation Reduction Act’s tax credits and other supports, much to the frustration of our other trading partners. North American trade ties, far from stoking fears of Ross Perot’s “giant sucking sound,” are now a vital part of U.S. economic development strategy.
This a unique moment for North America. U.S. policymakers can promote the competitive boost from trilaterally integrated supply chains with much less political blowback than in the past. This new political dynamic comes courtesy of the dramatic push to diversify sourcing from China but is aided by the unprecedented labour protections of USMCA/CUSMA, which include wage-enhancing rules of origin for autos and a “rapid response mechanism” to address unfair labour practices. Both lend political cover to a robust North American manufacturing, technology and services strategy.
Even in an environment driven by industrial policy and nearshoring, however, our nations need a coherent plan to attract investment to North America. It is not enough to chase subsidy dollars and assume companies eager to reduce their China footprint will commit to long-term investment here. Our three countries must create an investment climate characterized by certainty and predictability. And we must ensure that the agreement’s revived dispute settlement mechanism, which languished under NAFTA, is respected, preserved, and protected like the crown jewel it should be — particularly with the World Trade Organization dispute system having been severely hobbled.
North American dispute settlement is now the most efficient path to resolve challenges, with four panels requested thus far (dairy twice), a fresh consultation request from the U.S. over Mexico’s limitation of genetically modified corn imports and one looming over discriminatory Canadian digital policy. So far, all three countries have taken pains to reinforce dispute settlement’s credibility, with proceedings being managed professionally and generally in a timely fashion. The quality of the panel determinations has been unimpeachable, with the U.S. expressing “disappointment” about its recent loss in a case on auto rules of origin but also pledging to “engage Mexico and Canada on a possible resolution.”
At this juncture, all three nations need to show the world we are following the rules laid out by our agreement and are committed to making North America a “zone of predictability.” This will require flexibility in sensitive sectors from autos to agriculture to energy, where Mexico’s policies not only contravene agreed obligations but make energy supply and prices uncertain. Each partner will need to show it is moving towards compliance both in these disputed sectors and in those currently under discussion. Failure to demonstrate that the rules mean something will hurt all three.
Benefiting from nearshoring by default is one thing. But it would be better for North American workers and consumers alike if their governments were to signal they want the continent’s investment climate to be world-class and competitive. Doing so requires emphatic compliance with dispute panel determinations but also addressing disputes in agriculture, autos, and the digital realm before they become intractable. As the historical stigma of NAFTA finally fades in Washington, President Biden is due to visit Canada this month. There could be no better time to reinforce our joint commitment to preserve and protect the benefits of USMCA/CUSMA through rigorous compliance.
Rufus Yerxa was Deputy U.S. Trade Representative (USTR) from 1989-95 and Deputy Director General of the WTO from 2002-13.
Kellie Meiman Hock, Managing Partner at McLarty Associates, worked on trade issues in both USTR and the Executive Office of the President.
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