NAFTA negotiations are on the ropes

As negotiations to reform the NAFTA free-trade agreement struggle to advance, hobbled by extreme U.S. demands and the administration’s ongoing threats to withdraw, the rest of the world is moving on.

Officials are due to hold a sixth and penultimate round of negotiations in Montreal from Jan. 23-28 as time runs out to bridge major differences.

The European Union and Japan just finalized the world’s biggest free-trade pact that will cover 30 percent of global GDP. The European Union and Mexico are speeding towards a major update of their 17-year-old trade deal. Washington’s NAFTA partners Mexico and Canada, seeking to reduce their dependency on the United States, are aiming to cement closer trade and investment ties with China. Beijing is pushing ahead with its $1 trillion “Belt and Road” infrastructure initiative that promises to vastly expand its economic and diplomatic influence. Eleven other Asia-Pacific nations are moving forward with the Trans-Pacific Partnership (TPP) trade agreement, despite the Trump administration’s exit from the deal in one of the president’s first acts in office.

{mosads}Against this backdrop, America’s hostility toward NAFTA appears increasingly short-sighted and too rooted in over-the-top campaign rhetoric that demonized free trade in general, and Mexico.

Mexico is, of course, an easy piñata to beat in frustration over American job losses, overlooking the far bigger impact of China’s manufacturing boom, rising U.S. wages driven by labor unions, and increasing levels of industrial automation. The U.S. trade deficit with Mexico — whose economy is smaller than that of Texas — stood at $63.2 billion last year, dwarfed by the $347 billion trade gap with China. The trade deficit with Mexico is even less threatening to the U.S. than that number suggests. Despite its advantage on trade, Mexico runs an overall current account deficit, meaning that it helps reduce pressure on the U.S. economy by absorbing excess global savings.

Canada, meanwhile, had a trade deficit of $12.5 billion with the U.S. in 2016 — despite Trump’s insistence otherwise in his recent Oval Office meeting with Canadian Prime Minister Justin Trudeau.

If Trump wants to pick on anyone he should try China, which in addition to its hefty trade surplus with the U.S. is the world’s biggest exporter of capital with a $293 billion current account surplus. Yet the president has done little to back up his tough trade talk on Beijing, seemingly in thrall to President Xi Jinping’s power and China’s potential role in pulling North Korea back from the nuclear brink.

Pulling out of NAFTA would have its own geopolitical costs for Washington, which appear to be underestimated by the current administration. A vibrant Mexican economy is important to the United States because it helps curb illegal immigration and fuels exports for crucial U.S. sectors such as agriculture. Cut off from free trade with the U.S., Mexico would likely seek closer trade and investment ties with U.S. strategic rivals such as China, Russia and some Middle Eastern countries. 

A report released in December by the American Action Forum, a center-right non-profit, found that withdrawing from NAFTA would jeopardize 14 million U.S. jobs, expose U.S. businesses to $15.5 billion in new tariffs, and increase consumer costs by at least $7 billion — not to mention the shockwaves it could send through financial markets.

Just this week, two government sources mentioned that President Trump will announce the U.S. is pulling out of NAFTA sending the Canadian and Mexican currencies lower.

Despite these costs, U.S. negotiators are showing few signs of backing down from unrealistic demands on automotive content rules, dispute settlement and a five-year sunset clause that have left NAFTA teetering on the brink. Mexico’s ambassador to the U.S. said in December that the deal has a 50-50 chance of being terminated, and Goldman Sachs says withdrawal is the most likely scenario. One can only hope that the growing procession of Republican lawmakers and business leaders pleading the merits of NAFTA to Trump is having some effect. 

Make no mistake, NAFTA is far from perfect and needs to be reformed. Agreements on e-commerce, which barely existed when NAFTA was implemented 23 years ago, need to be updated along with other areas such as food safety, state-owned enterprises, and telecommunications. Negotiators also need to think about how to better balance security and trade, how to better use technology and information-sharing to ease the flow of goods and services, and how to improve the tracking of goods from origin to destination.

But ditching NAFTA to make good on an overheated campaign promise would be a huge own goal for the United States. In an increasingly competitive world, it would be a blow to business and a gift for China, Russia and others who are clamoring to get a foothold in Mexico’s economy. Is that the kind of influence we want on our doorstep?

Nelson Balido (@NelsonBalido) is the managing principal at Balido and Associates, chairman of the Border Commerce and Security Council, and former member of the Homeland Security Advisory Council.