The Economist Europe – July 22-28, 2017

The EconomistJuly 22nd 2017 31

1

F

OR months President Donald Trump

has veered between threatening to ter-

minate the North American Free-Trade

Agreement (NAFTA) and merely proposing

to bring it “up to date”. On July 17th, in a let-

ter to Congress, the United States trade rep-

resentative, Robert Lighthizer, made the

administration’s intentions clearer. They

are closer to revision than destruction,

which is a relief for Mexico and Canada,

the United States’ NAFTApartners. But

alongside conventional-sounding negoti-

ating objectives are flashes ofTrumpian ag-

gression and hints that the United States

will demand painful changes to the deal.

The stakes are high. A quarter of Ameri-

can trade in goods and services is with

Mexico and Canada. The three economies

tend to grow or shrink together and have

integrated supply chains. Fears that the

United States would abandon NAFTAhave

caused volatility in the markets for the

Mexican peso and Canadian dollar, and

talk of possible recessions.

Mr Lighthizer’s letter, published at the

start of what Mr Trump billed as “made in

America” week, calmed those fears. The

administration has been tamed by work-

ing through Congress. The smallerNAFTA

partners made Herculean lobbying efforts

to defend the agreement. Canadian minis-

ters bombarded American governors with

visits. On July 14th Canada’s prime minis-

ter, Justin Trudeau, appealed to governors

in a speech to protect “our shared North

Some of Mr Lighthizer’s ideas are po-

tentially ambitious but vague. He wants to

“strengthen the rules of origin” that set out

how much North American content a pro-

duct needs to cross borders duty-free. That

could be a tweak, or it could be a big dis-

ruption to trade among members of

NAFTA. There is talk of ensuring through

an “appropriate mechanism” thatNAFTA

countries do not manipulate their curren-

cies. But that could impinge on American

monetary policy.

Where Mr Lighthizer’s goals are the

most Trumpian, they will face the fiercest

resistance. Reflecting the president’s obses-

sion with the United States’ trade deficit,

the document’s first objective isto reduce

deficits with otherNAFTAcountries. This is

barmy; trade deals do not determine defi-

cits. The Mexican government’s response

has been to argue that the standard num-

bers neither reflect flows in the value each

country sends across borders nor the bil-

lions of dollars that Mexicans spend when

they shop in the United States. Canada,

whose trade surplus with the United States

in goods is smaller than Mexico’s, is wait-

ing to see how the Trump administration

proposes to reduce it. If the United States

insists, for example, on allowing countries

to block trade if their deficits get too large,

the talks could take an angry turn.

Another worry is the administration’s

approach to trade remedies, ie, the duties

that governments can apply ifan industry

is “injured” by imports. UnderNAFTA,

Mexico and Canada get special treatment.

The United States has to cross a higher legal

threshold to apply defensive safeguards

on their exports than it does on those of

other countries. In addition, under chapter

19 of the agreement, disputes between

NAFTApartners over other remedies go to

aNAFTAcourt. The Trump administration,

which regards the authority of foreign

American home”. A path to a renegotiated

agreement is in sight, but it will be rocky.

The new deal Mr Lighthizer has in mind

borrows from the Trans-Pacific Partnership

(TPP), the Obama administration’s deal

with 11 Latin American and Asian coun-

tries, which in effect updated NAFTA. But

one of Mr Trump’s first acts in office was to

withdraw from it. Like the TPP, the pro-

posed NAFTA2 would bring protections

for workers and the environment “into the

core of the agreement”.

The letter drops some of the most con-

tentious items from an earlier American

wishlist. There is no mention, for example,

of addressing the Trump administration’s

grievance that Mexico charges value-add-

ed tax on imports.

NAFTA

Redesigning the North American home

WASHINGTON, DC

Canada and Mexico face a tricky renegotiation of their trade agreement with the

United States

The Americas

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Zone defence

Source: Chad P. Bown, Peterson Institute for

International Economics

US imports subject to defensive duties, %

0

2

4

6

8

10

1994 2000 05 10 16

China

Canada and

Mexico

Rest of world