Illustration: Peter C. Espina/GT
The future of the North American Free Trade Agreement (NAFTA) will probably face a new round of reshuffling, as a renegotiation of the trade deal between the US, Mexico and Canada seems almost certain following US President Donald Trump's continuous attacks on it.
Trump has made no secret of his objection to NAFTA. Calling it "the worst trade deal in the history of the country" and blaming it for the loss of US jobs, he promised during his election campaign that he would renegotiate or terminate NAFTA. After taking office, Trump spoke to Canadian Prime Minister Justin Trudeau and Mexican President Enrique Pena Nieto about the issue.
US Commerce Secretary Wilbur Ross said at a press conference on Friday that the Trump administration would launch the formal process to renegotiate the trade deal "in the next couple of weeks."
There are four possible developments in the NAFTA renegotiation.
First, it may be hard for the US to launch a renegotiation, which requires a go-ahead from Canadian and Mexican leaders. While the Canadian government appears to neither oppose nor support new talks, the Mexican government, Trump's major target, is expected to boycott and delay the start of renegotiations. On January 26, Mexico's Pena Nieto cancelled a January 31 work meeting with Trump, due to possible factors like avoiding a confrontation about the renegotiation of NAFTA.
Moreover, the Trump administration will also need to get congressional approval to restart the talks. Most Republicans in Congress are supportive of free trade and concerned about the protectionist views held by Trump. Also, for about 30 of the 50 states, Canada or Mexico rank as the first or second largest export market, so there may be little support for the renegotiation at home. Against such a backdrop, negotiations are likely to be delayed for quite a long period of time, which may even last until the end of Trump's tenure. Even if the negotiation is initiated, there may be no result coming from the talks. The impact of the NAFTA renegotiation issue may be negligible for the three trading partners and the world as a whole.
In the second scenario, the trio may renegotiate and fine-tune certain terms so as to work out an updated version of the trade deal. If the Trump administration actively pushes forward the talks with an eye to fine-tuning and convincing Mexico to make some acceptable concessions on certain issues to enhance the US benefits, it may be easier to reach a new agreement. But the Trump administration is inclined to target bigger changes, which may involve the core interests of Mexico. In this case, an updated trade deal may be conducive to the US, but harmful to Mexico as the country may need to transfer a substantial part of its interest to the US. Overall, an updated version may benefit the three members to a certain extent.
In the third scenario, the renegotiation may touch core NAFTA terms and interests. As Trump aims to revitalize the US manufacturing sector to create jobs, the new terms may harm the core interests of Mexico and could also sideswipe Canadian interests, thus increasing negotiation difficulties and leading to no end result.
In the fourth scenario, if it is too hard to initiate a renegotiation or there is no result from the talks, the Trump administration may opt to withdraw from the trade deal. According to article 2205 of NAFTA, a party may withdraw from the agreement six months after it submits written notice. Moreover, if Trump is determined to pull out of NAFTA, he has the power to push it forward without congressional approval. But this will greatly damage the interests of the three countries, and opposition forces in the US, especially industries who would be affected, will not stand by and do nothing as it happens. Trump proposed the renegotiation to force Mexico to make concessions to boost US employment and growth, so withdrawal may be more of a bluff, rather than a practicable option.
On the whole, the first and second scenarios seem more likely and more realistic. If the Trump administration wishes to boost US benefits through renegotiation, the second choice is more desirable. It is unrealistic to expect that Mexico would transfer its core interests to promote employment and growth in the US. In fact, adopting protectionism to guide the return of manufacturing to the US is a violation of the market economy and free trade rules, which will only lead to a transition of manufacturing to other labor-intensive countries rather than to the US with higher labor costs.
The author is a research fellow with the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. firstname.lastname@example.org