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What NAFTA renegotiation means for Australia

It was always part of the Trump agenda to do something about the North American Free Trade Agreement (‘one of the worst deals ever’) covering the US, Canada and Mexico: the outcome is renegotiation rather than the threatened termination.

Photo: Flickr user Tim Pierce
Photo: Flickr user Tim Pierce

It was always part of the Trump agenda to do something about the North American Free Trade Agreement (‘one of the worst deals ever’) covering the US, Canada and Mexico: the outcome is renegotiation rather than the threatened termination. The Office of the United State Trade Representative has now issued an outline of its negotiation objectives. What does it say about the way the global trade environment is changing? What does this mean for Australia and its trading relationships?

NAFTA is more than two decades old, so it is not surprising that it could benefit from revisiting and tweaking. The world has changed over those two decades, and there are elements in subsequent trade negotiations (particularly the unfulfilled negotiations for the Trans-Pacific Partnership) which justify up-dating NAFTA. The aspects which are of special interest to Australia are:

  • The emphasis on bilateral trade deficits, rather than on a county’s overall multilateral balance
  • strengthening intellectual property rights
  •  reinforcing US overseas investment rights.

The first objective is to ‘improve the US trade balance and reduce the trade deficit with the NAFTA countries. In releasing the document, US Trade Representative Robert Lighthizer said:

President Trump continues to fulfill his promise to renegotiate NAFTA to get a much better deal for all Americans. Too many Americans have been hurt by closed factories, exported jobs, and broken political promises. Under President Trump’s leadership, USTR will negotiate a fair deal. We will seek to address America’s persistent trade imbalances, break down trade barriers, and give Americans new opportunities to grow their exports. President Trump is reclaiming American prosperity and making our country great again.

There are two misunderstandings here. First, the emphasis on bilateral trade balances is misguided. America has a deficit with some countries (e.g. Mexico) and a surplus with others (e.g. Australia). Bilateral balances should reflect comparative advantage: it makes sense for America to import low-tech manufactures from Mexico and pay for these by exporting its high-tech products to countries like Australia. Global trade is not like a barter economy, where your production is swapped deal-by-deal with another trading partner. Instead, the multilateral trade framework lets a country maximise the benefit from trade by exporting to the countries that value its exports most highly and importing from the countries that offer the best price. If all countries insisted on bilateral trade balance, global trade would shrink dramatically and what little trade remained would be distorted.

Second, the emphasis on exports is muddled. The main advantages of trade come not through the artificial promotion of exports, but rather through productive resources shifting into their best use (i.e. following comparative advantage).  Undistorted trade not only maximises domestic output, but gives consumers the benefit of the cheapest imports. The welfare of American consumers doesn’t feature anywhere in these negotiation objectives. This sort of export promotion is no help for former Appalachian underground coal miners and Detroit car-workers who have been overtaken by the advance of technology.

This ‘exports good/ imports bad’ mindset has more specific implications for countries like Australia. With the emphasis on enhancing American exports, Mexico can address the negotiating pressures by administrative measures to shift imports away from other suppliers (perhaps Australia), to favour America. There will be some cost to Mexico (America is not the cheapest supplier), but the main burden might be borne by alternative suppliers, not even at the negotiation table.

The intellectual property objectives have a strong ‘America-first’ tone: to ‘ensure provisions governing intellectual property rights reflect a standard of protection similar to that found in US law’. American owners of intellectual property have an understandable interest in increasing the value of IP, through longer and more comprehensive protection of their monopoly rights. This not only increases costs for IP users like Australia, but excessive protection for IP reduces innovation: the rules should give incentive for future innovation, rather than rewarding ideas of long-ago. Australia’s much-admired pharmaceuticals market is particularly vulnerable to any enhancement of intellectual property rights. Just what will be agreed is of course still open and Canada (as another net importer of IP) will be resisting strongly. But there is little doubt that if America gains IP advantage in NAFTA negotiations (such as setting the data exclusivity period for biologics at 12 years – longer protection that negotiated in the TPP agreement), this will become the norm for other trade agreements.

The objectives for foreign investment are to ‘secure for US investors in the NAFTA countries important rights consistent with US legal principles and practice, while ensuring that NAFTA country investors in the United States are not accorded greater substantive rights than domestic investors'. In short, American investors should be allowed to operate in foreign countries under American rules, while foreign investors in America work to American rules. Australia won a round of this fight with the Philip Morris decision, but the battle is not over yet.

Provisions against ‘currency manipulation’ have been a perennial obsession of some Washington stalwarts. This issue was relegated to an unenforceable side-letter in the TPP negotiations, but it makes a reappearance among these objectives.

All this might seem like far-away technicalities. But the broader message is contrary to the development of good rules for global trade, and unwelcome for a medium-sized country like Australia. The presumption strongly exhibited in these negotiating objectives is that America’s rules – developed within its own environment of vested interests, powerful lobbies and dysfunctional politics – should become the global standard. The goal of balanced bilateral trade and export-fetish add to the concerns. The multilateral WTO framework has been unable to develop global rules because it sought to achieve universal agreement. This alternative, with American rules spreading via a series of bilateral agreements in which the US is the dominant partner, is a poor substitute for a more inclusive process.

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