By Steve Dittmer
It's evident that the Trump administration was waiting for USTR Robert Lighthizer to be confirmed before notifying Congress that it was ready to proceed on NAFTA negotiations. Negotiations are expected to begin in August.
After taking hits from the administration on softwood lumber and dairy trade restrictions, after President Trump had indicated the Canadian negotiations wouldn't be difficult, the Canadians are taking a cautious attitude. Canada is an advanced western civilization with a population a fifth of the U.S. and a serious dependence on trade with its only contiguous neighbor. So they are always a bit anxious about trade discussions with the U.S. But Trump's negotiating style has them off balance more than usual — probably just where Trump wants them. But they are publicly ready to talk.
Mexican trade officials have indicated they've been ready to start negotiating for weeks. We're guessing, with the significant manufacturing and retail relationships built up between U.S. companies and factories and suppliers in Mexico, they feel confident they have negotiating power. Both countries have justification for confidence, as the utilization of advantages and differences in labor skills, costs, geography and taxes have been assiduously employed by American companies.
But while trade with Mexico is very important to U.S. businesses and agriculture, it is even more so for Mexico's economy. Exports account for a third of Mexico's economy and 90 percent of its exports are manufactured goods — many with American content — mostly “sent” to the U.S., (“U.S. Begins NAFTA Revamp,” Wall Street Journal, 05/19/17.) Mexican officials actually welcomed Lighthizer's triggering of the negotiation process, as the uncertainty has been weighing on everyone's minds. Besides that, Mexico has a presidential election in 2018, so they prefer an early start and finish.
We would like to point out something the media and most trade opponents often mischaracterize in trade discussions. They talk about this or that item being “sent” to America. The impression is of companies overseas loading up ocean-going containers with whatever they can find and exporting it to the U.S. In reality, every item imported into our country has been selected, ordered and paid for by some American company that wants it to use in manufacturing something or to resell to American consumers. Ditto for us. Every box of meat shipped overseas has been sold to a customer. Trade agreements get us access to markets, set tariffs and health and sanitation requirements. Private companies buy and sell goods within that government framework.
But while trade is a major economic factor for Mexico, we've seen no public discussion regarding how sensitive are other issues not expected to be part of these negotiations. Another major source of income for the Mexican economy is remittances sent back to Mexico from Mexicans living and working in America, whether here legally or illegally. Roughly $25 billion/year flows into Mexico from America, on average, $300 at a time. The unsolved difficulties involving immigration, the wall, America's businesses needing labor, drug cartels and inflamed racial overtones all hang over NAFTA negotiations with Mexico.
Incidentally, a $3.00 surcharge to send those remittances through Western Union would generate $250 million annually, a handy amount for wall building.
Evidently one thing that hasn't been agreed upon is whether negotiations will be two-way or three-way. Apparently, Canada and Mexico lean towards three-way negotiations but that runs contrary to President Trump's preference for bilateral negotiations. Lighthizer has indicated he would like to do a lot of negotiating in bilateral talks, unless that turned out not to work very well. We'll see how Canada and Mexico react.
There is another potential serious pitfall. The Border Adjustment Tax (BAT), which would slap a 20 percent tariff on all goods imported into the U.S. is still officially a part of the Republican tax reform plan. Trump has not expressed a preference on the BAT, which would seem to indicate he's leaning against it. Many Congressmen do not favor such an anti-trade measure but the Republican leadership is still defending it, terming it a “pay for” for tax rate cuts or for creating a “level playing field” with countries that tax incoming goods.
House Ways and Means Committee Chairman Kevin Brady (R-TX), while never mentioning the BAT in the developing months of the tax package, nevertheless has said there is no question NAFTA has been very successful and is looking forward to “seamless” moves to strengthen the agreement.
The BAT is the left hand that takes away what the right hand gives, so it is puzzling how Brady intends to straddle the fence on trade. Many observers do not expect the BAT to survive but one never knows.
While most Republicans are okay with improvements to the treaty, Democrats are giving their usual song and dance about including environmental and labor clauses in the agreement. Those provisions usually kowtow to environmental groups and labor unions wishing to foist their ideals on the other countries, government policies that would otherwise be considered internal affairs. While the TPP treaty that Trump ditched included the most complete provisions dealing with those issues, NAFTA was negotiated long before enviro-zealots and labor unions had the clout to insert them into international trade treaties.
Lighthizer listed the areas that could be modernized: intellectual property rights, labor and environmental standards and sanitary and phytosanitary measures. Those last can sometimes be used as trade barriers and the dairy and produce industries consider them a top priority (Morning Ag-Politico, 5/19/17).
That list does not seem so threatening, except as excuses for the Democrats to not vote for the revisions in the treaty. Yet, in this case, labor questions involve already existing, complex manufacturing relationships and sourcing rules.
Lighthizer said manufacturing provisions would be a major focus, yet he hoped to have them wrapped up by year end. While many automotive parts suppliers have moved to Mexico, NAFTA has helped keep North American auto production competitive against Europe and Asian manufacturers, according to the Wall Street story.
And yes, major changes in the agreement would have to be approved by Congress. We haven't seen any definitions of what would require approval.
Lighthizer will spell out the administration's objectives 30 days before the start. There are also a set of objectives Congress set in the Trade Promotion Authority law.
Some Democrats want to see clauses on currency manipulation and Trump mentioned those concerns regarding China during the campaign. Lighthizer has not excluded it from consideration, something that could introduce a lot of friction.
Lighthizer said he would like to settle two difficult issues before NAFTA talks start: sugar with Mexico and softwood lumber with Canada.
The message from as diverse groups as the U.S. Chamber of Commerce and nearly all of agriculture to the Trump administration: do no harm.
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Steve Dittmer lives in Colorado Springs, where he is Executive Vice President of the Agribusiness Freedom Foundation. AFF promotes free market principles throughout the agricultural food chain The AFF is a communications and educational initiative striving to preserve the freedom of the agricultural food chain to operate and innovate in order to continue the success of American agriculture.