This looks like a demonstration straight out of The Art of the Deal — make a grand demonstration of leverage, and wait for opponents to scramble in response. The White House hinted yesterday that Donald Trump would issue an official notice withdrawing the US from the North American Free Trade Agreement, the trade pact that Trump had repeatedly ripped during the 2016 campaign and promised to either fix or discard. By last night, both of our NAFTA partners had agreed on renegotiating the agreement instead:
Trump agreed on Wednesday not to pull out of NAFTA “at this time” during phone calls with the leaders of Canada and Mexico, according to The White House.
Trump spoke with Mexican President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau to assure them that he would pursue a renegotiation of — and not tear up — the landmark trade pact between their three nations.
“President Trump agreed not to terminate NAFTA at this time and the leaders agreed to proceed swiftly, according to their required internal procedures, to enable the renegotiation of the NAFTA deal to the benefit of all three countries,” according to a White House account of the calls.
This morning, Trump took a victory lap on Twitter while hailing the strength of the relationships with Canada and Mexico:
I received calls from the President of Mexico and the Prime Minister of Canada asking to renegotiate NAFTA rather than terminate. I agreed..
— Donald J. Trump (@realDonaldTrump) April 27, 2017
…subject to the fact that if we do not reach a fair deal for all, we will then terminate NAFTA. Relationships are good-deal very possible!
— Donald J. Trump (@realDonaldTrump) April 27, 2017
How much of a deal is this, though? Two days after his inauguration, Trump declared his intentions to renegotiate NAFTA, following his campaign promises that targeted the pact. Two weeks ago, the Washington Post noted that Trump might get a lot more than just a renegotiation. Mexico had taken the first steps required for NAFTA renegotiation internally, a development that looked like a potential White House win, but it also provided leverage that could have allowed Trump to dump NAFTA entirely and score a much bigger political win:
A communique posted by Mexico’s foreign and economic ministries on a government website on Wednesday said that the Mexican government had begun a series of consultations with the private sector, a process which it said would take 90 days. “The consultation in Mexico will start simultaneously with the internal process being carried out by the government of the United States,” the document said.
The White House did not respond to a request for comment and officials in the U.S. Congress said they had not yet been notified of any formal action. But trade economists said the process might be tied to U.S. legislation passed under former president Barack Obama that gives the president power to quickly broker a new trade agreement. Called fast-track authority, it requires the president to notify Congress 90 days before entering into negotiations for a new agreement.
If the White House is indeed proceeding under fast-track authority, that suggests Trump could intend to scrap NAFTA altogether and forge bilateral trade deals with Mexico and Canada instead, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. Trump and his administration have expressed a preference for bilateral deals, which they say allow the United States to better wield its economic heft at the negotiating table.
“I think they want to retire the name NAFTA, say they got rid of it, then put it into the history books,” said Hufbauer.
The message yesterday from the White House appeared to aim at that goal, too. If Mexico was already preparing to go along with it, then perhaps the message yesterday was aimed at Canada. Trump fired the first volley over softwood imports this week, a curious case for a trade war as American wood producers are already working at full capacity, according to St. Cloud State professor of economics (and occasional Hot Air contributor) King Banaian, whom I interviewed yesterday on Relevant Radio about this topic. The aggressive nature of Trump’s demands might have convinced the Trudeau government that it needed Mexico to balance US economic power — and Mexico may have come to the same conclusion.
This isn’t a deal yet, though — it’s just an opening round of negotiation. The real question is whether Trump can improve on NAFTA through this renegotiation process, and that may be tough to do:
Without NAFTA — which reduced or eliminated tariffs on most trade products after taking force in 1994 — commerce ties between the nations would need to be reset, raising the specter of more frequent trade disputes and higher tariffs.
U.S. trade with its NAFTA partners has more than tripled since the agreement took effect, rising to $1.1 trillion last year. Canada followed by Mexico ranked as the two biggest markets for U.S. exports, taking in a combined 34 percent of the total in 2016, according to a February paper published by the Congressional Research Service.
Heritage’s Bryan Riley argues that the best way to fix NAFTA is to expand its jurisdiction:
These technological advances have profoundly affected our economy. In 2014, the U.S. International Trade Commission calculated that digital trade had increased GDP by as much as $710.7 billion and created up to 2.4 million jobs.
But those gains have come despite government barriers that interfere with digital transactions. These obstacles include measures that block cross-border data flows or mandate the use of domestic servers or content. A renegotiated NAFTA should eliminate or at least reduce these barriers.
It should also be expanded to encompass sectors excluded from the original agreement. Perhaps the most prominent example of latent opportunity waiting to be unlocked is Mexico’s energy sector.
NAFTA allowed the government of Mexico to continue to control the exploration and refining of crude oil and natural gas. In recent years, Mexico has made major strides to open its energy market. Constitutional reforms enacted in 2013 liberalized the oil, natural gas, and energy sectors. These reforms should be locked in and expanded as NAFTA is modernized.
The end result will likely be more incremental improvements than dramatic shifts. Economically, it may only produce marginal differences. Politically, though, any effort at renegotiation will benefit Trump, especially in the short run — which is the reason for today’s victory lap.
Update: Sean Spicer offered an impromptu press briefing on NAFTA for the children of the White House press corps: