NAFTA: No A’s For Trump’s Administration

BloombergQuintOpinion

Why India Should Care

The distances from South Block in New Delhi to the White House in Washington, D.C., the Prime Minister’s Office facing Parliament Hill in Ottawa, and Los Pinos (The Pines) in the Bosque de Chapultepec (Chapultepec Forest) in Mexico City are 7,480, 7,059, and 9,102 miles, respectively. In other words, the loci of power in the North American Free Trade Agreement (NAFTA) parties are far from the core of the Indian government.

But, out of sight should not mean out of mind. For five reasons, Prime Minister Narendra Modi and his newly minted Commerce Minister, Suresh Prabhu, ought to care about the tripartite NAFTA renegotiations as if they were occurring across the Line of Control in Pakistan or Line of Actual Control in China.

  • First, the premise for the renegotiations is false but is already imposed on India.
  • Second, India may have foisted on it, sooner or later, the trade policy template for a new NAFTA.
  • Third, changes to NAFTA may upend the strategic calculus or detailed tactics of Indian business.
  • Fourth, the renegotiations confirm Washington, D.C. aims to help only a narrow base within the American electorate, Indian interests be damned.
  • Fifth, no Prime Minister can proclaim India to be a global power, and no Commerce Minister can match the United States Trade Representative, without a gut feel for how and why what happens anywhere matters to India.

These reasons also are criteria on which to grade Trump Administration efforts to rewrite NAFTA.

So far, no A’s.

To be sure, the Administration has not yet condemned itself to all F’s. It is no fairer to assign the Administration a final mark now than it is to swipe from the clutches of an examinee her paper before she completes her answers to all questions in the time allotted. NAFTA renegotiations, which commenced on August 16-20, continued over the Labor Day weekend in September, and will proceed through autumn, and might – or might not – wrap up with a new treaty before Mexico’s presidential elections in July 2018, and America’s congressional elections in November 2018. The Administration might – or might not – erase or modify what it’s work to date.

First, No ‘A’ for A False Premise

The Trump Administration triggered NAFTA renegotiations on the premise that bilateral trade balances among parties to an FTA matter. Indeed, on this premise, the President signed a March 2017 Executive Order to review every bilateral trade deficit. For Mexico, that means the Administration presumes NAFTA is the cause of the $63 billion deficit with Mexico in goods trade, which in turn causes job loss and income declines in the American manufacturing sector. For India, the same presumption, even though there is no FTA.

Messrs. Modi and Prabhu, notice the erosion:

Data from 2016 erodes the premise. America has a $75 billion trade deficit with Mexico in automobiles and auto parts. If that sector is removed from the net deficit calculation, then America enjoys a surplus. America also has a $7 billion trade-in-goods surplus with Canada, including the auto sector. And, America has large bilateral surpluses with both Mexico and Canada in services.

Theory erodes the premise, too.

Bilateral trade deficits are not caused by trade liberalization, at least not in the long run.

Low savings rates, and consequently low investment rates, are the underlying cause. Americans enjoy a wide array of merchandise, at cheap prices, made in North America. These consumers of last resort take on big time debt, incurring the opportunity cost of not ploughing a big chunk of their net household income into financial investments. Spend less, save more, invest wisely, including in your children’s human capital … and presto, the consumption-driven demand for imports falls. Currency manipulation by the exporting country can interfere with trade balances, but not even Trump’s Administration says Canada’s dollar or Mexico’s peso is fundamentally misaligned relative to the greenback.

Politics further erode the premise. The whole point of turning what had been a U.S.-Canada FTA into a U.S.-Canada-Mexico arrangement is continental integration. We are not Americans, Canadians, or Mexicans when it comes to trade. We are North Americans. It does not matter that the car is made South of the Rio Grande River, or North of the 42nd-49th Parallel. A new NAFTA-based North American legacy is supposed to disinherit the us-versus-them bequest from the 1846-48 Mexican-American War.

An employee works on the assembly line producing the new Ford Fiesta car, at the Ford Motor  plant in Cuautitlan Izcalli, Mexico, on May 11, 2010. (Photographer: Susana Gonzalez/Bloomberg)
An employee works on the assembly line producing the new Ford Fiesta car, at the Ford Motor plant in Cuautitlan Izcalli, Mexico, on May 11, 2010. (Photographer: Susana Gonzalez/Bloomberg)

Second, No ‘A’ for Bad Policy

The false premise on which the Trump Administration triggered NAFTA renegotiations reflects bad trade policy, namely, mercantilism.

Messrs. Modi and Prabhu, remember the Laws:

Through the Laws of Absolute and Comparative Advantage, Adam Smith and David Ricardo put paid the Mercantilist idea that England must maximize exports, minimize imports, store up precious specie such as gold and other precious metals it earns from its exports, and use that gold and silver to enhance its Royal Navy. Smith and Ricardo proved there is a net welfare gain to English society through the unilateral dismantling of trade barriers. No credible economist ever has disproved these Laws. Karl Marx and Vladimir Lenin set up an alternative paradigm, but let’s stay out of it for now.

The real policy shift should be not backward to 17th-century mercantilism but forward to a 21st century NAFTA. The updating issues are:

  • How can Mexico’s post-NAFTA liberalization of its energy sector –whereby it permits upstream foreign investment in oil and gas – be preserved to advance the goal of an integrated North American energy market? This question calls for revisions to NAFTA Chapter 6 and streamlining the process by which the parties approve cross-border pipelines and power grids.
  • Should intellectual property rules in NAFTA Chapter 17 be revisited? For instance, what geographical indication protections might be afforded to products originating in specially branded areas, how might geographically indicated (GI) -eligible products be identified in the first instance, and what kind of registry – centralized or decentralized – be used to list GI goods?
  • What rules should govern North American digital trade in goods and services to facilitate the free flow of low-value trade (e.g., through higher de minimis levels before burdensome customs documentation is imposed), protect customer data privacy, and ensure the integrity of electronic payments? This question calls for a new NAFTA Chapter, perhaps one cut-and-paste from TPP. Yes, that would be yet more evidence of bad trade policy. The Trump Administration withdrew from TPP in January 2017. Undeterred, Canada, Mexico, and the other 11 TPP countries are meeting about launching TPP.

India has a stake in these issues.

India’s industrializing economy demands fossil fuels that it can neither source entirely domestically, nor replace immediately with alternative sources.

Assam and Darjeeling tea drinkers worldwide know India is blessed with GI products that it has yet to protect commercially. Indian e-commerce entrepreneurs shudder at the prospect of barriers impeding cross-border internet transactions in their goods and services.

Workers carry bags of tea leaves at the Korangani Tea Estate in the Dibrugarh district of Assam, India, on  August 20, 2016. (Photographer: Sanjit Das/Bloomberg)
Workers carry bags of tea leaves at the Korangani Tea Estate in the Dibrugarh district of Assam, India, on August 20, 2016. (Photographer: Sanjit Das/Bloomberg)

Third, No ‘A’ For Distortion

NAFTA renegotiated on a false premise to advance mercantilist policy may distort trade and foreign direct investment patterns to the disadvantage of India.

Messrs. Modi and Prabhu, consider India’s cars and fruit:

It’s no secret India seeks to expand exports of passenger cars and trucks. How can these vehicles qualify as ‘Made in North America’, and thereby receive preferential treatment – e.g., avoid the 2.5 percent U.S. tariff on cars, and 25 percent tariff on trucks? The answer is 62.5 percent: at least 62.5 percent of the value of a vehicle needs to originate in the U.S., Canada, or Mexico for that vehicle to receive that treatment. Similar high ‘Rules of Origin’ (RoO) affect major auto parts, in which India also has an export interest.

The Trump Administration is enamored with a 70 percent auto Rules of Origin – may be higher – notwithstanding the fact 62.5 percent already is the highest Rules of Origin in any FTA in the world.

The higher the Rules of Origin, the more difficult it will be for India to export autos and auto parts into North America, and the more likely Indian producers will have to offshore their production facilities and outsource their supply chains to the U.S., Canada, and Mexico.

How about an illustration from agriculture?

Among the many American business groups that beg the Trump Administration to “do no harm” in renegotiating NAFTA are farmers. Well, most of them.

Having gained market access in Canada and Mexico thanks to NAFTA, major crop interests – including America’s most valuable farm product, corn – are chary of losing it. They might, because the Administration is poised to elevate small, labor-intensive fruits and vegetables over their interests. Winter fruits and vegetables have not fared well in competition with Mexico. Mexico is relatively better endowed than the U.S. with low-skilled farm labor. Tomatoes are labor intensive. Whereas one skilled farmer with a technologically adept tractor can harvest thousands of acres of corn, 500 workers are needed to handpick 600 acres of tomatoes. That those acres are in hurricane-prone areas like Southwest Florida raises another problem – climate change will compel crop allocation change. So, guess whether corn or tomatoes support rejiggering NAFTA?

India is not poised to be a large corn exporter to America. But bananas, papaya, and mangoes? You bet.

Yet, if a new NAFTA disadvantages Mexican tomatoes, then market access prospects for Indian perishables may perish. 
A vendor arranges tomatoes for sale at the Central de Abasto market in Mexico City, Mexico, on  July 28, 2015. (Photographer: Susana Gonzalez/Bloomberg)
A vendor arranges tomatoes for sale at the Central de Abasto market in Mexico City, Mexico, on July 28, 2015. (Photographer: Susana Gonzalez/Bloomberg)

Fourth, No ‘A’ For Women’s Rights

Generous Trade Adjustment Assistance (TAA) is the most loyal way to express a desire to help workers dislocated from NAFTA. While the original NAFTA implementing legislation contained a transitional TAA, the Trump Administration has no plans for its renewal. The Trump Administration is silent on the topic in NAFTA renegotiations. Its thinking seems to be TAA is not necessary if mercantilism corrects bilateral trade deficits.

False, as above.

Its thinking also embodies two hidden assumptions:

  • no other trading partner will retaliate against the U.S., nor even pursue new trade relationships with third countries, and
  • women don’t matter.

False again.

Already, Canada and Mexico are preparing ‘Plan B’ – what to do if NAFTA renegotiations collapse. So, for example, Canada is implementing its Comprehensive Economic and Trade Agreement with the EU. Mexico is looking to South American countries for its major crop needs. American producer-exporters cannot take their jobs, which rely on Canadian and Mexican markets, for granted. Women hold many of those trade-related, trade-threatened jobs. That’s why TPP dedicated Article 23:4 to women and economic growth.

Messrs. Modi and Prabhu, stay faithful to the interests of India’s women:

There are creative, do-able links to be forged among (1) government procurement rules, (2) labor standards, and (3) the status of women. Preferences in procurement for women owned suppliers? Rules on equal pay for equal work?

Link by link, women can be empowered through trade deals and help drive growth.

Fifth, No ‘A’ For Loyalty

For decades, America and Canada have battled over whether Canada provides unlawful subsidies to its softwood lumber industry. America lost every challenge it brought under the NAFTA Chapter 19 dispute settlement mechanism. The Trump Administration response amidst the renegotiations? Demand destruction of that mechanism, whilst imposing preliminary countervailing duties on Canadian softwood lumber.

Enter the Russians: with no countervailing duties on its softwood lumber, Russian exports are cheaper than, and are displacing, Canadian lumber in the U.S. market. Russian shipments are up 42 percent in 2017, with the May monthly total at 4,214 cubic meters, the highest since January 2008. Canadian shipments fell in the first half of 2017 by 1 percent.

U.S. President Donald Trump,  waves as he exits a news conference with Justin Trudeau, Canada’s prime minister, in the White House  on February 13, 2017. (Photographer: Andrew Harrer/Bloomberg)
U.S. President Donald Trump, waves as he exits a news conference with Justin Trudeau, Canada’s prime minister, in the White House on February 13, 2017. (Photographer: Andrew Harrer/Bloomberg)

Messrs. Modi and Prabhu, anticipate uncertainty:

There may be no lasting comfort in India’s emerging alliance with America. Russia is not America’s ally. Canada is. India is sort of in the middle.

David MacNaughton, the Ambassador of Canada to the United States, explained: “What we [Canada] can’t understand is why it is that some elements of the U.S. lumber industry would rather see imports from countries like Russia rather than their closest ally and friend, Canada.”

If America’s trade treatment of its buddy advantages a formidable rival, then maybe India should take another look at the South Asian Free Trade Agreement, push harder to conclude the Regional Comprehensive Economic Partnership, and think about a future with the Trans Pacific Partnership.

The Bottomline: Grades Matter

In the September 2016 Presidential Debate, candidate Trump declared “NAFTA is the worst trade deal maybe ever signed anywhere,” and since then has threatened (thrice between August 22-29, and again on August 30) to withdraw America from it. That superlative insolence was the specious bluster of a bully. The threat may not be credible, because withdrawal may need Congressional approval.

Nonetheless, in a changed climate of philistine international economic torrents, sub-par substance spewed with insolent intonation trumps respectful rationality.

Messrs. Modi and Prabhu, please don’t sit complacently in South Block:

Keep an eye on the NAFTA renegotiations. Better yet, grade the talks yourself on criteria that matter to India.

Raj Bhala is Associate Dean for International and Comparative Law and is the inaugural Leo S. Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or the University, or Dentons or any of its clients, and do not constitute legal advice.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.