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NAFTA Uncertainty Threatens International Trade

D.C. panel examines the future of multilateral trade agreements

NAFTA Uncertainty Threatens International Trade
Duke faculty address NAFTA during a Duke-in-D.C. panel discussion.

Uncertainty, more than any particular policy, is the greatest threat to international trade in North America, two Duke professors told an audience during a Duke-in-D.C. panel discussion recently.

Aaron Chatterji of the Fuqua School of Business and Stephen Kelly of the Sanford School of Public Policy spoke with The New York Times’ trade reporter Ana Swanson about what NAFTA renegotiations mean for the future of multilateral agreements and how they tie into the global economy. Swanson has been covering the talks for the past several months and offered a front-row seat to the conversation.

Kelly noted that NAFTA opened the doors to the free flow of goods between Canada, the U.S. and Mexico, but did little to facilitate the movement of the people who make the goods.

Kelly argued that, especially with regard to Mexico, issues of trade, illegal drugs and immigration became co-mingled during the 2016 presidential campaign, and remain so today.  This makes the NAFTA renegotiation talks more emotional, and makes a clear-eyed assessment of U.S. interests more difficult.

Undocumented migration may make the headlines, Kelly said, but the movement of goods increasingly defines international relationships. Mexico has signed trade deals with several other countries and the European Union, attracting large foreign investors like Audi.

“Audi can build a car in Mexico which it can then export duty-free to the United States and duty-free back to the European Union,” Kelly said.  If the current talks lead to the unraveling of NAFTA, as some fear, Mexico may be able to fall back on its other agreements.

These trading relationships have led to a shared use of North American resources that other global actors such as China and the EU lack: labor, proximity, shared cultures and history. A good imported from Mexico to the U.S. is made from parts that are up to 40 percent American-made, while a good imported from China is barely 5 percent American-made.

Swanson asked the panelists their thoughts on current NAFTA demands: a five-year sunset renegotiation clause, agricultural protections for American-grown produce and high tariffs on foreign-produced automobiles. For instance, U.S. trade representative Robert Lighthizer has proposed that automobiles imported to the U.S. must have at least 50 percent of their component parts made in the U.S. in order to avoid large tariffs.

Chatterji, a former senior economist for the White House Council of Economic Advisors , questioned whether the proposed amendments were actual demands or just negotiating tactics. On the automobile import quotas and tariffs, he said, “higher rules of origin are pretty unprecedented around the world.” Chatterji suggested these positions might be “poison pills” designed to scuttle the deal by making the other negotiating partners seem opposed to the administration’s demands.

Kelly added that even if the higher rules of origin are negotiating tactics, “from a global perspective, I’m sure the whole world wonders if we (the U.S.) are upsetting the apple carts with some of the these proposals in the NAFTA [renegotiation] talks that might even violate the WTO [World Trade Organization].” The proposals might not simply be poison pills or tough negotiating tactics, but against the international trade system that America once founded and enforced, said Kelly, who has spent several decades working as an American diplomat around the world as well as working on trade issues as a U.S. deputy chief of mission in Mexico and Canada.

The panelists said the importance of the U.S. negotiating a beneficial deal should not be done at the expense of working relationships with immediate neighbors who are our biggest trade partners.

Kelly pointed out that Canada is America’s largest oil supplier, providing more than 60 percent of the net petroleum imports to the U.S. Further, America has a trade surplus with Canada and relies on Canada as a prime destination for America’s services economy.

Chatterji expanded the conversation out to American trade deals in general. The Trump Administration has proposed renegotiating the Korean-American Trade Agreement (KORUS) and immediately withdrew America from the Trans-Pacific Partnership (TPP) upon entering office.

“There’s a group of people who think being globally engaged in the world helps the United States of America and advances certain interests,” said Chatterji. “And there’s the other side that thinks we’re getting a raw deal and its hurting our interests.” The issue is when the beliefs of one side will likely hurt their own economic options.

Similarly, Kelly added, “there’s an incoherence to these various positions, and if you step back and look at the geopolitics, just the numbers, doing business with your neighbors has many advantages over doing business with countries farther away.”

With NAFTA at least, “we don’t sell things to each other. We make things together,” Kelly said.