North American energy trade — NAFTA is key to closing the trade gap

President Trump recently announced his plans for “seeking not just energy independence but American energy dominance,” speaking at the Department of Energy. One can take exception and seriously worry about the bellicose obsession of this president to dominate and be “number one all the way,” but it is refreshing to see the president acknowledge that the energy technology revolution is a geoeconomic reality.

Hopefully, he will recognize that this is a historic geostrategic opportunity for United States as it begins NAFTA talks on August 16. This will require clear thinking, skillful negotiation, and resisting tendencies to seek win-lose and not win-win deals with other sovereign powers. 

{mosads}In recent years, North America has had a revolution in energy production and financing. For the first time since the 1940s the United States is poised to be a net energy exporter, Canada has become a top-five energy producer, and Mexico has opened its energy sector to private investment. These developments have combined to position North America as the key player in the world energy market.

While Trump has historically been fixated on America’s traded goods deficits with the world, especially Mexico and China, he will need to realign his thinking and focus on how cooperation with our neighbors can positively leverage combined North American assets. Energy products — which include crude oil, the world’s largest traded commodity in the world — have never been subject to World Trade Organization (WTO) rules. Depending on how NAFTA renegotiations play out, they could further improve North America’s energy integration and the region’s global competitiveness. A successful trilateral deal can be the template for future trade agreements. 

Now that Trump has arrived in the White House at a key inflection point in America’s geostrategic and economic history, he can use energy exports to reduce America’s global trade shortfalls.This includes deficits with China, which accounts for 40 percent of America’s trade imbalance. Instead of acting on his 2016 campaign promises to slap tariffs on goods that American consumers import from China, Mexico, etc., he has actually proposed building a petroleum pipeline to Mexico — albeit “under the wall!” — and to sell liquefied natural gas (LNG) to Asia.

While his June 29th speech at the Department of Energy singled out prospects of selling LNG to South Korea, it did not mention exporting North American energy resources to China, which has a large and growing demand for cleaner energy to replace its unhealthy dependence on polluting high carbon coal. In the previous administration, 

China and the U.S. were actively engaged in bilateral and multilateral energy negotiations including the Paris Agreement. The Trump administration, which announced in June that it would withdraw the U.S. from the climate agreement, is now reportedly looking to jettison the official use of the term “climate change” and replace it with “weather extremes.” But whatever the politically correct term may be, the fact is that there is a window of opportunity today to increase U.S. energy exports to China given its commitment to finding cleaner energy sources and investing heavily in renewables.

If he plays his cards right, Trump can remain committed to delivering on his campaign rhetoric of reducing U.S. trade deficits by forging a strategic energy plan to supply China with America’s newfound energy resources. He has walked back from threats to pull the United States out of NAFTA and to add double digit tariffs on goods from China in moves that could significantly reduce U.S. (and global) trade, which would hurt both consumers and exporting producers. While the oil and gas industries have been discovering more fossil fuel resources on and off shore, President Trump may discover that the optimum answer to reducing the U.S. trade deficit without disrupting the momentum of the U.S. economy is through exporting North American supplies of its newfound energy wealth.

According to World Bank data, China has been a net energy importer since 2001, and its energy imports have grown rapidly since. If the Trump actually pursues a trade policy based on his campaign rhetoric to reduce the trade deficit with China, it will damage the U.S. and undermine the full exporting potential of North American energy companies. As the world’s top importer of oil and the third largest importer of liquefied natural gas, much of China’s economic diplomacy in South America, Africa and the Middle East has centered on the procurement of energy and natural resources. By providing North American energy exports to China, the U.S. can begin to close the trade gap with China.

In an historic collaboration, The American Petroleum Institute, Asociación Méxicana de Empresas de Hidrocarburos and Canadian Association of Petroleum Producers recently issued a joint declaration calling for “fully liberalized trade of all goods used in the energy industry, which are essential to the oil and natural gas industry’s integrated North American supply chains.”

Introducing energy into a renegotiated NAFTA would help to insure the competitiveness of North American energy supplies — from the U.S., Canada, and Mexico — on the world market. It would be a major first step toward including energy resources into a world wide rules-based trade regime that, if properly worded, would set the stage for future multilateral trade agreements covering energy. Furthermore, promoting new investment in energy infrastructure in NAFTA renegotiations can spur more U.S. exports of natural gas to Mexico.

Finally, the United States may have a recipe to tackle its chronic trade deficit with China without putting a halt to trade that could harm U.S. jobs in trade in manufactured and agricultural goods and services. If the Trump administration’s negotiators skillfully cooperate with Mexico and Canada, they could exert combined leverage to strike a better North American energy deal vis-a-vis China. As a result, Trump would get to display “energy dominance” and advance his campaign promises to American workers. And North American and global trade may get a new chance to demonstrate that smart trade deals can be a win-win for producers and consumers.

Paula Stern is the chairwoman of the Stern Group and former chairwoman of the US International Trade Commission. Stern was keynote speaker at the Atlantic Council Forum in July on the future of NAFTA held in Mexico City. 

The views expressed by contributors are their own and are not the views of The Hill.