Make North America Competitive Again: Modernize NAFTA Now!

By Kathryn Hauser — As negotiators from the United States, Canada and Mexico wrap up the second round of talks to update and renegotiate the North American Free Trade Agreement (NAFTA), it’s a good time to stop and reassess where we are headed and what course corrections may be needed.

Signed into law in 1994, NAFTA made it easier to trade between the United States, Canada, and Mexico. As a result of the elimination of tariff barriers, trade among the three countries quadrupled over the ensuing 23 years, rising from around $290 billion in 1993 to more than $1.1 trillion in 2016. The tariff-free zone, coupled with a robust supply chain platform and global export base from North America, significantly strengthened the competitiveness of the U.S., Canada and Mexico vis-à-vis China and the European Union.

Thus far, the Trump Administration has focused on a total renegotiation of NAFTA on the grounds that the U.S. has “lost out” to our trading partners to the north and south. The rhetoric coming from the Administration has emphasized the trade imbalances with Canada and Mexico as proof that NAFTA is not working for the average American worker. Yet economists and business leaders from all segments of the economy contend that the trade deficit statistic is merely a single snapshot of trade in goods — and does not take into account the flow of services and intellectual property. Indeed, services account for nearly 80% of the U.S. economy, and the U.S. has a trade surplus in services trade with both Canada and Mexico. The short-term fixation on trade deficit numbers do not truly reflect the dynamism, growth and competitiveness of the North American market.

A truck travels from Canada to the US. Goods — as opposed to services and intellectual property — only represent a small portion of trade between the US and other countries.

NAFTA was negotiated well before the creation of the Internet, the proliferation of information technologies by business and government, and the related expansion of productivity that has transformed our economies and given rise to globalization. NAFTA addressed the trade barriers of the early 1990s, namely, tariffs on manufactured products and agriculture. Basic issues related to cross-border trade in services are included in the NAFTA agreement, but trade in services has expanded tremendously over the past quarter century, as has our understanding of the ways in which services are produced and traded. This is particularly true in the area of cross-border data flows, digital commerce, and regulation. Likewise, the NAFTA rules on intellectual property protection are stuck in the 1990s and offer insufficient protection for today’s competitive world.

As the negotiators return from the second round of talks, it is imperative that they take stock of the broader implications for NAFTA in the 21st Century. Rather than looking backward on outdated technologies, dying industries and yesterday’s trade battles, they should reorient their focus onto issues that are critical to securing the long-term competitiveness of the NAFTA partners in the global economy. This means that emphasis should be placed on strengthening the agreement among the three countries on trade in services, cross-border data flow, digital trade and intellectual property. These are the key elements that will ensure NAFTA’s relevance in the global economy and provide a solid foundation for building an integrated North American marketplace that is the most globally competitive region of the world. This is the recipe for expanding jobs, prosperity and economic growth in the United States, as well as Canada and Mexico.

Negotiators should approach the talks with a shared sense of purpose. A strengthened NAFTA will benefit all three partners together — be a “win-win-win”.

In a traditional trade negotiation, each government tries to obtain the most favorable treatment for its companies. But this is not a traditional negotiation — we are not trading cloth for wine. Rather, after nearly a quarter century of shared experience with NAFTA, our economies and our businesses are ever-more inter-connected, with integrated supply chains up and down North America.

For example, some 80 percent of Mexico’s exports go to the United states and, according to the Mexico Institute at the Wilson Center, 40 percent of the value of Mexican exports to the United States was created first in the United States, then exported to Mexico to be used in a good destined for the American market. For Canadian exports to the United States, 25 percent of goods added value originated in the United States. To put this in perspective, only 4.2 percent of Chinese exports to the United States are U.S.-made.

An “us versus them” approach to the negotiations belies the economic reality: trade, investment and innovation are taking place simultaneously in Canada, the U.S. and Mexico. This process is so interconnected that separating the piece parts into baskets is a “fool’s errand” that will produce little and detract from the opportunity that is in front of us.

Now is the time for a forward-looking focus on strengthening the global competitiveness of the NAFTA partners vis-à-vis the rest of the world. It is not the time for a backward looking nostalgic view of industrial trade and agriculture production. It is a time to rewire our thinking about the major drivers of the digital economy and pursue a NAFTA modernization that will drive job creation, competitiveness and innovation throughout the North American continent.

Kathryn Hauser is a GFCC Senior Fellow and co-founder and managing partner of Policy Connections International, LLC, aWashington-based external relations consulting firm providing services to companies and non-profit organizations. She regularly engages with Congress, the Executive Branch, regulatory agencies, foreign governments, business associations, standards-setting organizations and stakeholder groups, and is a frequent public speaker on trade policy and innovation.

From 2005–2012, she served as the U.S. Executive Director of the TransAtlantic Business Dialogue and previously held senior positions at the Pharmaceutical Research and Manufacturers of America (PhRMA), the Information Technology Industry Council (ITI), a private investment advisory firm, and Bell Atlantic Corporation, now known as Verizon. She began her career at the Office of the U.S. Trade Representative and served as Deputy Assistant U.S. Trade Representative for Multilateral Negotiations.