Three Simple Ways to Improve NAFTA

What do Donald Trump and Bernie Sanders have in common? Not much, but they’ve both slammed the North American Free Trade Agreement as a jobs killer and a corporate boondoggle. They’re both right, but they’re also both wrong: NAFTA has hurt workers, at least in certain sectors of the economy, but the solution is not, as Sanders and President Trump have both suggested, to tear up the treaty and start from scratch.

NAFTA is flawed, but it also provides a wealth of economic benefits. Its problems are fixable. Instead of throwing the baby out with the bathwater, the White House should seek to negotiate three crucial amendments to the treaty.

Buy American Again

Since the very first governments emerged, leaders have understood the wisdom of using the treasury to support and grow the domestic economy. The ancient Romans hired Romans to build their aqueducts just as the American government has, for centuries, looked to American companies to build its ships, aircraft and infrastructure. When governments have to make big purchases, it just makes sense for them to purchase from their own taxpayers.

But one of NAFTA’s most unpopular provisions changes that time-honored principle. Chapter 10 of NAFTA imposes rules on government procurement procedures. The treaty requires that nearly all procurements be “origin blind,” meaning the purchaser is not allowed to prefer domestically produced products over foreign competition.

A rethinking chapter 10 is long past due. The provision is unpopular in Canada and Mexico as well as the United States. Changing the rule wouldn’t require the U.S. government to buy American in every case — if Canada has better iron or Mexico has cheaper corn, the government can and should buy it. But given the choice to purchase equal goods, it’s just common sense to prefer domestic producers.

Stop Promoting Offshoring

One reason free trade creates so many advantages for businesses is that it allows them to cut production costs. That saves them money, and they can pass the savings along to consumers. NAFTA has done a lot to help companies cut their costs, but it’s gone too far in an important area.

Under NAFTA’s chapter 11, the government is actually encouraging some businesses to fire American workers and move their jobs overseas.

With NAFTA’s dispute settlement mechanism, companies can sue and win millions in damages against governments they say violate the rules of the treaty. But the catch is that the treaty grants special access to this dispute settlement mechanism to companies that have moved jobs overseas. Firms that keep jobs local are forced to go through traditional courts, which are slower, more expensive, and less likely to lead to a win.

In other words, the current treaty creates incentives to move jobs away. The solution is obvious: remove the offshoring incentive by allowing everyone access to the mechanism.

Strengthen Rules of Origin

A third easy fix for NAFTA would popular with all three member states: write some rules of origin with teeth.

Free trade deals like NAFTA are intended to reduce tariffs and other barriers preventing businesses in signatory countries from selling products across international borders. The goal is to help local businesses grow by giving them access to more markets. Trade agreements work toward those goals by slashing taxes on products that originate in their partners’ nations.

The problem is that deciding where a product comes from is harder than it looks, and poorly written rules are allowing some countries to get a free ride.

Consider a tee shirt with a “made in Mexico” label. That label obviously means that the shirt was produced in Mexico, but the cotton might have been grown in Egypt or Brazil. Under NAFTA’s rules, that shirt could be imported to the United States without triggering unfavorable tariffs and taxes because it was “made” in Mexico. But really, much of the shirt’s value comes from countries like Vietnam that aren’t signatory’s of NAFTA.

In fact, nations like Vietnam are able to get all the benefits of free trade with the U.S. without allowing American businesses access to their markets.

The solution is to crack down on rules or origin. If a product is from Mexico or from Canada, so be it. But if a product is really from some other country and just goes through a last-minute processing tweak in Mexico before it arrives in the United States, then it should be subject to tariffs. Countries like Vietnam and Brazil shouldn’t get all the advantages of free trade without taking any risks.

NAFTA is far from perfect, but it’s also much better than a massive North American trade war. The treaty needs to be amended, not torn up for scrap or used for kindling. These three easy fixes could be implemented without renegotiating the entire treaty, and they’d be popular in all three NAFTA countries. It’s time to get to work.

Regards,

Ethan Warrick
Editor
Wealth Authority