NAFTA 2.0’s Poison Pill For China Will Turn Out To Be A Dud



Harry G. Broadman | Forbes

The victory proclaimed by the Trump Administration for its renegotiation of a “modernized” North American Free Trade Agreement (NAFTA) is a hollow one. Despite many months of wrangling with our closest neighbors to the North and South of us—our second and third largest trading partners—in fact, few substantive changes have been introduced to the 1994 pact. That hasn’t stopped the White House from touting the deal. Why?  Because Mr. Trump and his trade team see NAFTA 2.0 as the model to tame nations outside our hemisphere—especially the use of it as the vehicle to proliferate a poison pill lying at the heart of the agreement the U.S. wants to be deployed to corner China and clip its wings from engaging in pernicious trade practices. But there are two fundamental barriers to this scenario playing out.  First, Washington will find it tough going to sell this framework to countries with whom there isn’t a pre-existing agreement similar to NAFTA to be amended.  Second, as a practical matter, the U.S.-inserted Chinese poison pill will turn out to be of little therapeutic value, not only in failing to coerce other countries to exercise this provision but to actually induce changes in Beijing’s trade policy conduct. Following the announcement on September 30, 2018 concluding the negotiation of the new “United States Mexico Canada Agreement” (USMCA), initially the press focused on the most apparent accomplishment to come out from tension-filled trade talks: the seemingly innocuous re-branding of the original NAFTA (whose name I will admit to having fondness for, in part since I was a member of the early 1990s NAFTA negotiation team). Perhaps it’s a bit unfair to blame the press for its undue attention to the change in name, which quickly proved to be an awkward choice.  After all, even the President’s top economic advisor, Larry Kudlow, had trouble pronouncing the new moniker the day of the announcement. But what didn’t fully sink into the press was the substantive import of the dropping of the words “Free Trade” from the new deal. The change is no accident.  It accurately reflects the ardent mercantilist perspectives of President Trump and his U.S. Trade Representative, Robert Lighthizer.

Usually the objective of renegotiating free trade agreements is for all sides to further reduce tariff and non-tariff barriers so as to enlarge the flows of trade and investment across the signatories’ borders.  Where behind-the-border (that is, in-country) dislocations are engendered, perhaps even worsened, by increased flows—which almost always occur in varying magnitudes across sectors and locales—those are to be addressed by national governments, for example, public provision of worker retraining; of re-location allowances; and of employment in high priority areas serving national investment needs, such as infrastructure systems. The USMCA would provide for very little of either result.

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