The Five Lessons of NAFTA Negotiations

The Five Lessons of NAFTA Negotiations

The third lesson is that the details matter. Some of the provisions that are currently being ignored by commenters on NAFTA are buried deep in the texts and schedules.  These may turn out to be deeply consequential for NAFTA parties.  Some may also affect outside parties.  As an example, the auto rules of origin require a significant and growing share of autos, trucks, parts, components, steel and aluminum to be made within NAFTA (with more expensive labor inputs as well).  For suppliers based outside of NAFTA, this is going to be extremely problematic or even catastrophic.  These orders could be cancelled outright and never replaced. Alternatively, NAFTA 2.0 could force a renewed look at offshoring or sourcing entirely for export.  Either way, existing supply chains are likely to be under severe stress.

The fourth lesson is that NAFTA contains some problematic provisions that might spread elsewhere.

Evaluating Trade Deals Like NAFTA 2.0

Evaluating Trade Deals Like NAFTA 2.0

Since NAFTA 2.0 builds on the base of the original NAFTA, the new deal had some advantages over the TPP.  For example, tariffs between the parties are already set at zero.  This remains, although do note that there are very complicated tariff rate quotas in place in NAFTA 2.0 that were not scrapped.  Indeed, the level of genuinely new market access granted to partners that have known and worked with one another for decades is vanishingly small.  While much focus, as an example, has been on Canada’s new market access for dairy, the total amount given amounts to barely 0.4%.  And the United States, in return, has an equally complex system of barriers in place to protect its own dairy industry from competition (as well as sugar, oranges, and others). The deeply problematic bits of the agreement can be found buried in the texts.  For instance, the rules of origin (ROO) are incredibly complicated.  Given that tariffs are zero, the only way to keep out goods is to craft ROOs that are impossible to follow. Clearly, for many products, this objective has been met. The level of NAFTA content required in fairly large swaths of products is extremely high.  Commentators keep focusing on the insane requirements for auto production, but note that for a wide range of goods, new NAFTA content rules require 50% or more content.  To make matters worse, in many products, these rules tighten after 3 years, rising to as much as 70% local (ie NAFTA) content.

The Paradigm Shift in Trade: Business is NOT as Usual Anymore

The Paradigm Shift in Trade: Business is NOT as Usual Anymore

The new paradigm has not been established yet.  Kuhn describes a protracted battle that takes place during times of shift as the crisis plays out over what ought to replace the discredited old model.  Trump has fired the starting gun on the battle for the future of the global trading system.  In his world, the US will draw up the gates and manage with only those favored few bilateral partners that share similar perspectives.  The European Union just presented a plan to save the current WTO.  But because they have not yet recognized the extent to which we are standing on the precipice of the shift, the plan has already been derided as weak.  It tweaks around the edges of the existing system. Canada is holding a conference of “middle powers” next month to brainstorm new ideas.  They will need to be bold.  In designing a way forward, officials need to recognize that whatever comes in the future will—of necessity—be radically different that the system that we have been comfortable with for more than seven decades.

The Challenge of Reforming the Global Trading System

Having negotiations just over rules will require flexibility by members because it will be much harder for members to return home and clearly point to “gains” from WTO changes.  In many places, adjustments to specific provisions could even lead to short term challenges. But without any way to address legitimate demands by many members to more accurately reflect the situation in the global trade regime in 2018 and beyond, the system itself is under increasing threat. We have forgotten how important the WTO has become to the business world.  It operates like air.  It is only when it is missing that it becomes obvious how much it was needed. Without creativity and flexibility by all members, the WTO is at risk of evaporating.  The focus ought to be on updating the global rule book, rather than increasingly carving up and out smaller and smaller bits of the economy to be tailored for various member interests. 

Cybersecurity: A Key Building Block for Digital Trade in Asia

Companies need effective information flows to manage and grow their business operations.  But as part of our ongoing work with the 16 governments in the Regional Comprehensive Economic Partnership (RCEP) trade talks, we know that officials often argue that data cannot flow without critical building blocks in place first.  Three important elements include cybersecurity, data privacy and consumer protection. We have taken on the task of working with companies in the region to develop what we think are sensible regulatory frameworks for each of these areas.  These frameworks will be accompanied by indexes to track Asian government progress towards meeting specific elements.  The first framework, on cybersecurity, is presented here and reprinted below.  We had planned to present the cybersecurity framework to trade ministers in Singapore this weekend at the ASEAN Economic Ministers meeting.  After all, the first element of the framework argues that trade and economic officials must be involved in the process of setting cybersecurity policy and not default to defense or home affairs alone.  Unfortunately, ASEAN places cybersecurity matters under the political and security architecture and not in the economic pillar.  It did not fit anywhere on the AEM agenda. This rather proves the point--cybersecurity cannot simply be placed in the remit of security agencies, but must include a broader set of stakeholders including trade and economic officials.