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ISSUE BRIEF 11.29.17
NAFTA Renegotiations: Constraints and Likely Outcome
Tony Payan, Ph.D., Françoise and Edward Djerejian Fellow for Mexico Studies, and Director, Mexico Center
At the opening of the renegotiations,
INTRODUCTION U.S. Trade Representative Robert E.
For almost a quarter of a century, the Lighthizer explained U.S. objectives. They
North American Free Trade Agreement included the elimination of trade deficits
(NAFTA) has been the centerpiece of in favor of a “balanced” and “reciprocal”
economic relations among all three trade relationship, revision of the rules of
countries in North America—the United origin, reforms to the labor market in Mexico
States, Canada, and Mexico—and has, to a with the intention of increasing wages,
considerable extent, facilitated cooperation measures against monetary manipulation,
in other areas, such as security and the elimination of mechanisms for resolving
law enforcement, as all three countries commercial disputes in favor of national
viewed the agreement as a symbol of a judicial proceedings, and procurement of
broader strategic partnership. Criticisms government contracts.5
of NAFTA have never been entirely In response, Mexico and Canada took
absent in the United States or Mexico— similar—though not identical—positions,
and are much less evident in Canada. ones fundamentally against the more
However, since Donald Trump’s arrival protectionist aspects of the Trump
on the political scene there has been a administration’s renegotiation agenda.
heightened reexamination of the economic In fact, until August 2017, Mexico and
relationship among all trading partners. Canada still believed that the renegotiation
As candidate and now president, Trump was an opportunity to “modernize” the
treaty. For many, the modernization of
The outcome of
has conducted a frontal assault on NAFTA.
Candidate Trump declared in September NAFTA would include new provisions on renegotiations depends,
2016, for example, that NAFTA was “the rules of origin; the facilitation of trade theoretically, on the
worst trade treaty ever approved.” 1 at the borders and a review of customs points of intersection
processes; a further opening of the energy
President-elect Trump said that Mexico of the three national
had taken advantage of the United States.2 and telecommunication sectors; regulatory
uniformity; access to government contracts agendas and the win
Consequently, on May 18, 2017, Trump
formally notified Congress that NAFTA at all levels; the integration of investment, sets resulting from the
was to be renegotiated.3 The arguments financial, and services markets; new rules areas where the parties
on intellectual property; the inclusion of
justifying the revision of the agreement would be willing to
include the loss of jobs in the United States electronic commerce in the treaty; and
reconsideration of competition rules and make concessions.
due to changing trade flows resulting from
NAFTA (about 700,000, according to the environmental and labor measures.6 The
U.S. Trade Representative 4) and the trade term “modernization” was controversial
deficit with Mexico (around $64 billion from the beginning, because modernization
in 2016). The renegotiation of the treaty meant expansion of the agreement, which
began in August 2017. the United States did not seek, and thus
the three countries did not appear to haveRICE UNIVERSITY’S BAKER INSTITUTE FOR PUBLIC POLICY // ISSUE BRIEF // 11.29.17
the same definition of the term. Canada, and to reinforce the sovereign institutions
like the United States for example, pushed of the nation-state as the ultimate arbiter
for a review of stagnant Mexican wages—a in trade disputes. These goals, outlined
step resisted by Mexico as detrimental by USTR Lighthizer, dashed Mexico’s and
to its development goals.7 Canada also Canada’s hopes of modernizing the treaty,
pushed for discussions on environmental although there may be some progress on
and indigenous peoples’ rights; the U.S. and certain issues—e.g., Mexico’s energy sector
Mexico were largely uninterested in these or Canada’s dairy industry. The Trump
issues. The modernization agenda was also administration’s goals have, in fact, moved
complicated by civil society organizations Mexico and Canada to push to keep NAFTA
and economic actors in the three countries, as intact as possible. If Mexico and Canada
as they viewed renegotiations as an want to save the agreement, there appears
opportunity to protect or advance their to be a narrow path to do so. However,
The crucial factors narrower interests.8 given the relatively larger economic and
running through the Although the three countries kept their political power of the United States, the
negotiations—and negotiations largely secret in order to reach two treaty partners will likely have to make
an agreement quickly,9 the parties are so far some concessions to allow the Trump
what narrows the apart that they have already announced that administration to claim political victory.
path to a successful talks will have to go well into 2018.10 Thus,
renegotiation—are the faced with a prolonged debate on free trade
in the U.S., dissimilar agendas from Mexico FIRST CUT: POLITICAL DIVERGENCE
promises Trump made
and Canada, and a looming presidential
to his electoral base. An analysis of political differences
election in Mexico on July 1, 2018, the
among the NAFTA parties is essential
central question is: What is the most likely
to understanding the narrow path that
outcome of the negotiations?
successful negotiations must take. A
successful renegotiation requires common
THE PATH OF WHAT IS POSSIBLE: values—the intrinsic benefits of free trade,
for example, which has been a recurrent
DISAGREEMENT IN PRINCIPLE
theme of U.S. international economic policy
The outcome of renegotiations depends, for decades. The Trump administration’s
theoretically, on the points of intersection of stance toward free trade, however, marks
the three national agendas and the win sets a break from that of its predecessors.
resulting from the areas where the parties Instead, it bears a protectionist stamp, more
would be willing to make concessions.11 This in common with mercantilism than the
would require an agreement in principle— economic liberalism that has driven the
freer or less free trade, for example—and U.S. trade agenda under Democratic and
negotiations that go from there. In practice, Republican administrations alike.
however, the objectives of the United In contrast, Canada has taken a
States are the starting point for NAFTA clearer stance in favor of robust free
renegotiations. Consequently, because the trade. Mexico, however, has adopted a
United States’ position is the narrowest of more complex, mixed position given its
all and Mexico’s and Canada’s positions are development imperatives—which include
relatively more expansive, the parties have maintaining relatively low wages to bolster
essentially been far apart in all the rounds the competitiveness of its workforce12—and
that have taken place so far. domestic political constraints.13 This is the
The crucial factors running through reason why Mexico’s leadership has stressed
the negotiations—and what narrows the the country’s economic relationship with
path to a successful renegotiation—are the United States as a path to development
the promises Trump made to his electoral and is likely to make concessions to
base: to seek an American advantage in finalize negotiations as soon as possible.
trade deals, to eliminate trade deficits, to Clearly, Mexico—like Canada—is in general
re-shore and retain manufacturing jobs, opposition to the position of the Trump
2NAFTA RENEGOTIATIONS: CONSTRAINTS AND LIKELY OUTCOME
administration, which does not appear to on free trade within a free trade agreement.
value free trade in and of itself and seems This is why some in Mexico and Canada
to view trade negotiations as largely zero- argue that that no deal is better than a bad
sum transactions, but it faces important deal.16 Canada has already said it could fall
constraints of its own in carrying out back on its 1989 free trade agreement with
successful negotiations. the U.S., and Mexico has suggested that it
would retreat to World Trade Organization
rules if negotiations fail. But Mexico and
SECOND CUT: THREE KEY ISSUES AND Canada will not leave the talks because a
INTERSECTIONS renegotiated NAFTA contains protectionist
elements. They will stick to it if they believe
Political issues will no doubt help shape
they still benefit. They are not likely to exit
the outcome of NAFTA renegotiations—and
on principle, even if they make concessions
thereby the future of trade in North America.
they believe are in violation of the spirit of
This has already been playing out during the
free trade.
rounds of negotiations that have taken place
The irony of seeking to achieve
to date. In fact, the most consequential
“balanced” trade through an agreement is
outcome thus far— gridlock on key issues
evident in the talks on agricultural goods.
the United States has put on the table—has
The U.S. has recently asked for seasonal
been the result of political calculations.
limits on imports of Mexican agricultural
This section addresses three of the most
products. Such a quota scheme is not
contentious: trade deficit reduction,
only costly to American consumers of
wages in Mexico, and dispute resolution
Mexican farm products, but it lends itself
mechanisms.
to retaliation. Mexico has already issued
warnings on such limits, and it believes
Addressing Trade Deficits through NAFTA
that its greatest leverage is precisely in Political issues will no
The Trump administration has made agriculture, where it is a key market for
reduction of the U.S. trade deficit,
doubt help shape the
American farmers.17
particularly with Mexico, a major goal of outcome of NAFTA
the renegotiations. This is a difficult goal Addressing Mexican Wages and American renegotiations—and
to include in a trade agreement because Workforce Competitiveness thereby the future of
trade deficits are the product of many other
complex variables and may not even have
The second central objective presented trade in North America.
by the Trump administration is an
a negative impact on the economy.14 Trade
improvement in the competitiveness of U.S.
deficits are the result of a host of decisions
workers, particularly in the manufacturing
by private actors—from manufacturing
sector, through higher wages and better
firms to individual consumers—that
working conditions in Mexico. The Trump
may or may not conform to government
administration has essentially argued that
objectives. Moreover, there are policies that
Mexico has kept wages artificially low and
governments can pursue to ease deficits
made Mexican workers more competitive
while still avoiding protectionism.15
over their American counterparts. Thus,
One way to reduce trade deficits
the U.S. president wants Mexico to raise its
through a trade agreement is to manipulate
wages to even the playing field for American
trade incentives through increases in import
workers. Indeed, Mexico’s salaries have
tariffs and other forms of protectionism.
remained much lower than those in the
However, these are contrary to the spirit
U.S. or Canada.18 Mexico’s position is that
of free trade itself and will be costly,
salaries and work conditions are a domestic
primarily to companies heavily engaged in
issue best addressed by market forces, not
crossborder trade and manufacturing, and
by a trade agreement. On this, however,
to consumers who benefit from imported
Canada and the U.S. Congress have decided
goods at no or very low tariffs. In other
to take the Trump administration’s side and
words, a negotiated trade balance through
demand that Mexico improve salaries and
NAFTA implies the imposition of restrictions
3RICE UNIVERSITY’S BAKER INSTITUTE FOR PUBLIC POLICY // ISSUE BRIEF // 11.29.17
working conditions for the country’s labor a distant prospect.20 Moreover, domestic
force. If Mexico does not take a more flexible politics will be as important as economic
stance and offer concrete steps to legislate arguments. Unsurprisingly, there are signs
improvements in the well-being of the that the leadership in all three countries
Mexican working class, the treaty is at risk. understands that concessions will have to
be made all around to ensure that all parties
Addressing the Elimination of International achieve at least partial political victory. This
Dispute Settlement Mechanisms may explain why no one is willing—yet—
A third objective of the United States is the to walk away from the talks; all parties
elimination of Chapter XIX, which allows have agreed to extend the timeline for
for the creation of binational panels that renegotiations. This indicates that they will
provide binding reviews of antidumping stay at the table until they find a solution
and countervailing duty rulings. The U.S. whereby all can claim a “win,” even if most
president prefers that disputes be resolved concessions will be to the United States.
within domestic judicial systems. But Trump—with low favorable ratings
Canada and Mexico view this mechanism as in the polls and a stalled legislative
essential to fair outcomes in trade disputes, agenda—is in dire need of a political victory.
as they believe that U.S. federal courts and Successfully renegotiating NAFTA will give
Negotiations may him one. His NAFTA team will likely get
judges would not be fair. Canada, in fact,
yet fail. NAFTA may views Chapter XIX as essential if NAFTA is to concessions on nearly all issues, although
still collapse. But the be saved. For Mexico, these mechanisms are they may fall short of initial U.S. demands.
The United States will likely obtain pledges
likeliest outcome is also a priority.
The Trump administration, however, on Mexican and Canadian export restrictions
that, by mid-2018, to the United States. Mexico and Canada
values the primacy of sovereign
all three parties will institutions—U.S. courts—and is wary of will also open up sectors where the United
walk away with an supranational arrangements that constrain States stands to gain, such as e-commerce
agreement that allows national sovereignty. Trump—a believer in and government procurement, and
further open their energy industries to U.S.
them to claim a the traditional state as the fundamental
businesses. The United States will also gain
force for advancing the interests of its
political victory. concessions on U.S. national content in
citizens—has expressed doubts on the
desirability and wisdom of international manufacturing and force a Mexican pledge
institutions, including dispute settlement to revise its wage policy. Mexico and Canada
mechanisms.19 Mexico and Canada’s could also make concessions on dispute
position is understandable, as dispute mechanisms, perhaps by making them
resolution mechanisms are especially voluntary. Such concessions may be enough
important to countries that see themselves for Trump to claim victory. Whether such
in weaker positions on international issues, concessions will do much to address the
including trade disputes. president’s broader goals—notably a U.S.
economic revival based on a resurgence
in manufacturing employment—is another
THE FUTURE OF TRADE IN NORTH question altogether. America’s fundamental
AMERICA economic issues far transcend trade with
Mexico and Canada.
What do the political and practical issues The Mexican government also needs
examined tell us about the outcome to end the negotiations quickly and claim
of NAFTA? Considering these points its own political victory. There will be
simultaneously can help answer this a contested presidential election in the
question because together they suggest summer of 2018, and the current front-
how far apart the parties are, not only in runner is hostile to NAFTA. These political
terms of the principle of free trade but also necessities will influence Mexico’s timetable
on the substantive details. for talks; compromises will likely be rushed
Most assessments agree that a win/ in early 2018. Mexico will accept higher U.S.
win (or, rather, win/win/win) solution is content in its manufacturing sector, commit
4NAFTA RENEGOTIATIONS: CONSTRAINTS AND LIKELY OUTCOME
to some export restrictions in agriculture, releases/2017/august/opening-statement-
promise to increase imports from the U.S. ustr-robert-0.
in areas such as energy and government 5. Ibid.
procurement, and pledge to revise its wage 6. United States Council for International
policy. Similarly, Canada will make some Business, “USCIB Comments on Negotiating
concessions on soft wood, dairy products, Objectives Regarding NAFTA Modernization,”
and a few other areas. This may be June 12, 2017, http://www.uscib.org/
politically difficult for Prime Minister Justin uscib-content/uploads/2017/06/USCIB-
Trudeau, but he remains popular and may be Comments-on-NAFTA-Modernization.pdf.
able to gain tolerance from his constituents. 7. Dudley Althaus, “NAFTA Talks Target
Negotiations may yet fail. NAFTA may Stubbornly Low Mexican Wages,” The
still collapse. But the likeliest outcome is Wall Street Journal, August 29, 2017,
that, by mid-2018, all three parties will walk https://www.wsj.com/articles/nafta-
away with an agreement that allows them talks-target-stubbornly-low-mexican-
to claim a political victory. Thus, the most wages-1503999002.
likely future for NAFTA is neither continuity— 8. Wolf Richter, “The 1st Round of
that is off the table as per U.S. goals—nor a NAFTA Negotiations are [sic] Done—But
“modernized” agreement that the U.S. does the Outcome is a Secret,” Business
not appear to want. The probable result is Insider, August 21, 2017, http://www.
an agreement that will include new areas businessinsider.com/first-round-of-secret-
but is in general more restrictive (less free, nafta-negotiations-2017-8.
if you will), with the political interests of the 9. Ibid.
Trump administration decisively shaping the 10. Bloomberg News, “NAFTA
final document. In the end, NAFTA will be Ministers Extend Negotiations into 2018,”
saved—without common values between https://www.bloomberg.com/news/
the Trump administration and NAFTA’s two videos/2017-10-17/nafta-ministers-
other partners—mostly because of political extend-negotiations-into-2018-video.
necessity. And Canada and Mexico will wait 11. R. D. Tollison and T. D. Willett, “An
for a better day to “modernize” it. economic theory of mutually advantageous
issue linkages in international negotiations,”
International Organization 33, no. 4 (1979):
ENDNOTES 425-449.
12. Interestingly, Trump and unions in
1. Jon Greenberg, “Was NAFTA Worst
the U.S. and Canada agree on this point.
Trade Deal Ever? Few Agree,” Politifact,
They argue that they will not support an
September 29, 2016, http://www.politifact.
agreement that does not force Mexico
com/truth-o-meter/article/2016/sep/29/
to review its low wages as a competitive
NAFTA-worst-trade-deal-ever-few-agree/.
advantage. See Alicja Siekierska, “Low
2. MSNBC, “Trump: I don’t blame Mexico
Wages ‘Elephant in the Room’, at NAFTA
government for taking advantage of the
Talks, Say Auto Industry Unions,” Financial
United States,” January 11, 2017, https://
Post, August 28, 2017, http://business.
www.cnbc.com/video/2017/01/11/trump-
financialpost.com/transportation/low-
i-dont-blame-mexico-government-for-
mexican-wages-elephant-in-the-room-
taking-advantage-of-us.html.
at-nafta-talks-say-auto-industry-unions.
3. U.S. Trade Representative,
13. A major national election will be
Memorandum, May 18, 2017, https://ustr.
held on July 1, 2018, and polls show that
gov/sites/default/files/files/Press/Releases/
the political party of President Enrique Peña
NAFTA%20Notification.pdf.
Nieto appears to be in trouble. What’s more,
4. Robert E. Lighthizer, “Opening
the front-runner, Andrés Manuel López
Statement of USTR Robert Lighthizer at
Obrador, from the left-leaning MORENA
the First Round of NAFTA Renegotiations,”
Party, has been a critic of NAFTA.
August 2017, https://ustr.gov/about-
us/policy-offices/press-office/press-
5RICE UNIVERSITY’S BAKER INSTITUTE FOR PUBLIC POLICY // ISSUE BRIEF // 11.29.17
14. Daniel Griswold, “America’s
Maligned and Misunderstood Trade Deficit,”
AUTHOR
Cato Institute, April 20, 1998, https:// Tony Payan, Ph.D., is the Françoise and
www.cato.org/publications/trade- Edward Djerejian Fellow for Mexico Studies
policy-analysis/americas-maligned- and director of the Baker Institute Mexico
misunderstood-trade-deficit. Center. Payan’s research focuses primarily
15. Joseph E. Gagnon, “We Know What on border studies, particularly the U.S.-
Causes Trade Deficits,” Peterson Institute Mexico border. His work includes studies
for International Economics, April 7, 2017, of border governance, border flows and
https://piie.com/blogs/trade-investment- immigration, as well as border security
policy-watch/we-know-what-causes- and organized crime.
trade-deficits.
16. Stefanie Eschenbacher, “Business
Leaders Say No NAFTA Better than Bad
Deal,” Reuters, October 11, 2017, https://
www.reuters.com/article/us-nafta-
trade-mexico-ceo/business-leaders-
say-no-nafta-better-than-bad-deal-
idUSKBN1CH01N.
17. Reuters, “Mexico Eyes Brazil Farm
Products as Hedge on Trump Threat,”
February 24, 2017, http://www.reuters.
com/article/us-brazil-mexico-usa/mexico-
eyes-brazil-farm-products-as-hedge-on-
trump-threat-idUSKBN1632D0.
18. Mercer Salary Surveys, “Mexico’s
Average Daily Wages: 2000-2017,” https://
tradingeconomics.com/mexico/wages.
See more policy briefs at: 19. See Trump’s speech before the
www.bakerinstitute.org/issue-briefs
United Nations on September 19, 2017,
This publication was written by a whereby he outlines his “America
researcher (or researchers) who First” doctrine (http://expansion.mx/
participated in a Baker Institute project. mundo/2017/09/19/el-discurso-completo-
Wherever feasible, this research is de-donald-trump-ante-la-asamblea-
reviewed by outside experts before it is
de-la-onu). For the text of his speech
released. However, the views expressed
herein are those of the individual
see https://www.upi.com/Top_News/
author(s), and do not necessarily Voices/2017/09/19/Full-text-of-Trumps-
represent the views of Rice University’s speech-to-United-Nations-General-
Baker Institute for Public Policy. Assembly/4901505852211/.
20. The Economist, “On NAFTA, America,
© 2017 Rice University’s Baker Institute
Canada and Mexico are Miles Apart,” October
for Public Policy
27, 2017, https://www.economist.com/
This material may be quoted or news/finance-and-economics/21730420-
reproduced without prior permission, american-demands-are-so-extreme-
provided appropriate credit is given to some-suspect-it-not-wanting-deal-all.
the author and Rice University’s Baker
Institute for Public Policy.
Cite as:
Payan, Tony. 2017. NAFTA Renegotiations:
Constraints and Likely Outcome. Issue
brief no. 11.29.17. Rice University’s Baker
Institute for Public Policy, Houston, Texas.
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