Renegotiating NAFTA: Is This Simply Rhetoric or Should Major Changes Be Considered?

By Sara Snedeker

 

The North American Free Trade Agreement (NAFTA) is a trilateral trade bloc between the United States, Mexico and Canada, and is the largest agreement of its kind in the world. NAFTA went into effect on January 1, 1994, after controversial and lengthy negotiations. Discussion of a free trade agreement between the United States and Canada began in the early 1980s during the Reagan administration, and the U.S.-Canada Free Trade Agreement was the result. This agreement established the groundwork for NAFTA; its provisions included the elimination of tariffs, increase of investor rights, anti-dumping laws and the rules regarding which goods would qualify for special treatment under the agreement, among others. By December 24, 1988, both countries had approved the agreement. In June 1990, under the George H.W. Bush administration, negotiations began to expand the trade agreement to include Mexico. When the agreement was finalized in August 1992, it began a long process of approval in both the United States legislature and the public. During the presidential election of 1992, opponents and proponents each had strong opinions on the advantages and disadvantages of a free trade agreement. Fifteen years later, the effects of NAFTA, its impact and whether there is a need for reform are still being debated.

 

The possibility of a free trade agreement with Mexico was particularly troublesome for labor and environmental groups. Many protectionists claim that free trade agreements lead to a “race for the bottom,” meaning that the country with the cheapest cost of production is rewarded with business, so countries will lower their environmental and labor standards in order to better compete. The “race to the bottom” prediction was based on game theory, which shows why parties can seldom cooperate with one another, and is certainly a valid concern. During the 2002 presidential election, reform party candidate Ross Perot famously said that Americans would hear a “giant sucking sound” of jobs being lost to Mexico if NAFTA was approved, since laborers in Mexico would work for lower wages than competing Americans. Environmentalists had similar concerns; Mexican factories with fewer environmental regulations had lower costs than American factories and it was argued that business would flow in the direction of the pollution. President Bush championed NAFTA, saying that increased foreign trade would do far more good than harm to American businesses. Bill Clinton offered a qualified opinion, calling for regulations to be attached to the agreement to protect American jobs and pacify the concerns of environmentalists. After Clinton won the election, he negotiated side agreements with the Mexican president to accompany NAFTA. Despite these measures, opposition to NAFTA was still strong, particularly in the House of Representatives; even House Democrat leader Richard Gephardt opposed NAFTA. President Clinton campaigned heavily on behalf of NAFTA, and both the House and the Senate passed the agreement in November 2003.

 

There are several provisions of NAFTA that are in need of major change, and extensive renegotiation should be considered for the United States to protect its interests. Since the beginning of the trade agreement in 1994, the United States has lost approximately 3.1 million manufacturing jobs and the US trade deficit with Mexico has increased from $9.1 billion in 2003 to $138.5 billion in 2007. The number of jobs lost does not tell the complete story; higher paid manufacturing positions have been disproportionately affected by the trade agreement. Many of the problems stem from the fact that the United States and Mexico are drastically different countries economically, and the inequality between the parties is not addressed by NAFTA. Perhaps the most controversial section of NAFTA is chapter 11, which allows for private companies and individuals to sue for compensation when government actions harm their investments. The interests of a private organization should not supersede laws and regulations enacted by the government. As a result of chapter 11, the nations involved in NAFTA are required to adapt their domestic laws to the interests of private industry. Because of the controversy surrounding this provision and its bias toward corporations, chapter 11 should be eliminated if NAFTA is renegotiated.

 

Other troublesome sections of NAFTA are those regarding agriculture. Agriculture was such a controversial issue that, during initial negotiations, separate agreements were reached with each country. Details of the US-Mexico agreement have had questionable effects on trade. From 1991 to 1994, the U.S. agricultural trade surplus with Mexico and Canada increased by $203 million. This trend has drastically reversed since NAFTA; since its inception, the surplus has decreased by $1.498 billion. One product demonstrating the problems with agriculture in NAFTA is corn. Before NAFTA, corn was only imported into Mexico if domestic supplies were insufficient. NAFTA eliminated this practice, but allowed American agriculture subsidy programs to remain in place. This combination has led to dumping of corn into Mexican markets and has decreased the cost below the cost of production, harming both Mexican and American farmers while costing the American taxpayer the value of the subsidy. Using this example, it is easy to see why renegotiating NAFTA in regard to agriculture is necessary. Individual countries should be primarily responsible for their own agricultural needs to avoid disrupting market prices. Although NAFTA allowed for a 15-year phase-out of Mexican tariffs on corn, the transition occurred much more quickly than originally anticipated, and the problem must now be corrected.

 

Another questionable aspect of NAFTA is the energy proportionality clause. This clause requires Canada to maintain its share of energy exports (around 60%) to the US, regardless of Canadian energy supplies. In essence, the energy proportionality clause requires Canada to export energy to the US even when they are experiencing shortages. No other free trade agreement has a requirement to export, and even Mexico does not have a similar requirement. This is not only controversial because of the negative effects on Canadian energy companies and customers, but it also has the potential for harming the environment. Because Canada is required to export a certain amount of energy, it cannot reduce exports in order to conserve oil. In addition, the Canadian energy supply is shrinking, which makes the renegotiation or elimination of the energy proportionality clause absolutely necessary.

 

During the 2008 election primaries, then-candidate Barack Obama vowed to open discussion with Mexico and Canada to renegotiate NAFTA, and stated "we can't keep passing unfair trade deals like NAFTA that put special interests over workers' interests." Even Hillary Clinton, whose husband signed NAFTA into law, no longer supported NAFTA during the presidential primary race. In an interview with TIME, Mrs. Clinton said that “NAFTA was, in principle, a good idea to try to create a better trading market between Canada and the United States and Mexico” and that “free trade doesn't mean trade without rules.” The recent statements of politicians indicate that Washington has realized that Ross Perot was at least partially right; although the sucking sound wasn’t quite so loud, NAFTA is not viewed as a success. Popular opinion is in favor of the renegotiation, but now we must wonder whether an appropriate agreement can be forged to satisfy opposing views.

 

It is somewhat unclear whether the Obama administration supports the renegotiation of NAFTA. Despite his strong opinion during the primaries, the White House website contains no official statement regarding NAFTA or foreign trade policy. Obama’s initial selection of Bill Richardson, who was a democratic whip in the House when NAFTA was originally debated, as the Secretary of Commerce may indicate that he is not quite as protectionist as he appeared to be during the primary. However, given the current economic crisis and the widespread job losses that the United States is currently facing, protecting American manufacturing jobs has become even more important. Following Obama’s meeting with Mexican President Calderón shortly before his inauguration, incoming White House Press Secretary Robert Gibbs issued a statement saying that “President-elect Obama said that with both countries facing very difficult economic times, it’s important to work together to maintain a constructive and comprehensive dialogue. He expressed his continued commitment to upgrading NAFTA to strengthen labor and environmental provisions to reflect the values that are widely shared in both of our countries...” This statement demonstrates Obama’s commitment to reforming NAFTA and address the concerns that have surrounded NAFTA since discussion of free trade with Mexico began. It may be difficult, however, to make effective changes to NAFTA without a commitment from all three countries for extensive reform. Although NAFTA contains a provision allowing any country to withdraw from the agreement with six months notice, this option would be disastrous for US foreign relations with Canada and Mexico. The best option is to begin discussing possible changes to NAFTA that will satisfy all parties involved.

 

Foreign trade is critical to the US economy, but American jobs and environmental standards should not be sacrificed for the luxury of easier trade with Canada and Mexico. It is necessary to completely scrutinize NAFTA in order to determine what changes are necessary to protect US interests during this economic crisis. Chapter 11 and the energy proportionality clause should be eliminated, additional provisions protecting existing American jobs and wages should be added, and clauses regarding agriculture must be removed from the agreement entirely or substantially revised. The government should use the data from the last 15 years to analyze each provision of NAFTA and work to eliminate or modify those that do not meet the needs of the American people. If all three countries analyze NAFTA independently before trilateral negotiation, discussion can begin with a clear sense of what must be changed. In addition, discussions of expanding NAFTA to include other countries (NAFTA-plus) should not be supported by the United States. Due to the extensive scope that NAFTA covers, including more countries in South and Central America would only make protecting specific American interests more complicated. Instead, separate free trade agreements, if they meet certain standards, should be negotiated. The United States should encourage foreign trade, but NAFTA goes too far and it must be analyzed and rewritten to meet the specific needs of all parties. It is up to President Obama to lead this discussion and transform NAFTA into a tool of economic growth rather than one plagued by failure.

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