PRESERVING AND MODERNIZING NAFTAA FREE TRADE AGREEMENT FOR A NEW GENERATION

JACOB DUBBERTJIMMY SENGENBERGER

POLICY PAPER NO. 005 FEBRUARY 28, 2018

Millennial Policy Center 3443 S. GALENA ST., SUITE 120 DENVER, CO 80231

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Millennial Policy Center Policy Paper February 28 | 2018

PRESERVING AND MODERNIZING NAFTAA FREE TRADE AGREEMENT FOR A NEW GENERATION

JACOB DUBBERTJIMMY SENGENBERGER

About the Millennial Policy Center

The Millennial Policy Center is a research and educational institute (a think tank) dedicated to addressing public policy issues that affect the Millennial Generation (born 1981-1998) and to developing and promoting policy solutions that advance freedom, opportunity, and economic vitality for Millennials throughout the United States.

Our vision is an America which realizes the full potential of Millennials – economic progress and achievement, individual liberty, and full participation in American society – to generate a new era of freedom, opportunity, andprosperity.

In collaboration with our policy advisors and policy fellows, the Center generates and shares knowledge, and it fosters public debate and understanding through various mediums.

For more information please visit our website: WWW.MILLENNIALPOLICYCENTER.ORG

About the Authors

Jacob Dubbert is a Research Assistant at the Millennial Policy Center. He is currently working toward his Masters degree in Global Finance, Trade, and Economic Integration at the University of Denver. Jacob received his Bachelors in Finance from Colorado State University in 2012.

Jimmy Sengenberger serves as Chairman, President, and CEO of the Millennial Policy Center. Jimmy is also a seasoned radio talk show host on Denver radio stations KDMT 1690 AM and News/Talk 710 KNUS. He is a 2011 graduate of Regis University, Summa Cum Laude, with a degree in Politics and a minor in Economics, and also spent nearly three years as a legal assistant.

AcknowledgmentsA special thanks is due to Regis University Professor Robert Margesson, Mr. Keith Nobles, and Liberty Day Institute Director of Development Eric Boyd for their time in reviewing and offering suggested revisions for this paper.

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After more than twenty-four years, the future of the North American Free Trade Agreement

(NAFTA) is uncertain. President Donald Trump has proposed to renegotiate or withdraw from

the historic trade agreement, labeling it as one of the worst trade deals in American history.

Although we believe NAFTA has been largely beneficial to the United States and should be

maintained, this presents a valuable opportunity to embolden the gains NAFTA has provided,

while modernizing the agreement to reflect developments in the 21st century.

The Millennial Generation is creative, innovative, and eager to grow and prosper. Millennials are

uniquely attuned to individual initiative and achievement, which stems directly from being free to

think, free to act, and free to choose. Free markets have given us an unprecedented amount of

choices, opportunities, and prosperity that enable the above to be realized. And free trade between

and among countries is a critical component of what constitutes the free market.

For the Millennial Generation especially, it is important for NAFTA renegotiation to expand upon

the many benefits it has provided by further liberalizing trade and investment among the three

countries. Since its inception, NAFTA has created new markets for U.S. companies, spurred

investment, and brought economic efficiency, allowing for lower prices and expanded choices for

Americans. This has led to increased trade among the U.S., Mexico, and Canada, increased

economic output, and created numerous jobs.

The U.S., Canada, and Mexico are currently undergoing negotiations for a new trilateral

agreement. Although constantly changing, the U.S. has officially proposed its desires for updating

the trade agreement with its Summary of Objectives for the NAFTA Renegotiation. The overall

objective of the U.S. is to modernize NAFTA to reflect a fairer deal for the American people and

to address the persistent trade imbalances the U.S. has with Canada and Mexico. In our view, the

means for NAFTA reform are highly protectionist, which will only result in a disruption of the

successful regional and integrated economy NAFTA has created.

In this paper, we present the benefits of free trade and free trade agreements such as NAFTA. Then

we offer a comprehensive evaluation of the key objectives proposed by the U.S. for NAFTA

renegotiation and provide an alternative proposal that would modernize and expand the existing

NAFTA. Our proposal suggests NAFTA needs to be revamped to address new developments in

the 21st century, while continuing to grow and solidify the reasons the agreement was implemented

in the first place: to create an integrated, regional economy among the U.S., Canada, and Mexico.

EXECUTIVE SUMMARYEXECUTIVE SUMMARYEXECUTIVE SUMMARYEXECUTIVE SUMMARY

Modernizing for A 21Modernizing for A 21Modernizing for A 21Modernizing for A 21stststst Century NAFTACentury NAFTACentury NAFTACentury NAFTA

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Free trade is a policy based on the unrestricted exchange of international goods and services, in

which a government does not interfere with imports and exports by protectionist policies.1 The

benefits of free trade were highlighted in Adam Smith's argument that the division of labor among

countries leads to specialization, greater efficiency, and higher aggregate production. In short, all

parties involved in free trade will be better off by specializing in what they're good at producing,

and trading for the rest. Ultimately, different relative prices between countries allow for all

countries involved to gain from trade through exchange and specialization.

Critics of free trade argue that protectionist policies have historically allowed for nations to develop

and for industries to thrive. However, government regulations and controls on goods and services

misdirects resources and labor into inefficient uses, resulting in higher costs for consumers.

Protectionism stifles competition, innovation, and higher-quality products by artificially

supporting inefficient industries and keeping workers in obsolete jobs. Essentially, protectionism

helps a limited number of producers at the expense of all consumers.

Free trade promotes competition and innovation, leading to better products, new markets for

producers, increased investment, and better-paying jobs for hard-working Americans.2 Through

market forces, free trade allocates resources to their most productive use and allows a nation to

maximize the value of its domestic goods and services. By generating economic growth and

lowering costs to consumers, free trade has substantially increased individuals’ standard of living.

Free Trade Agreements Free Trade Agreements Free Trade Agreements Free Trade Agreements

Free Trade Agreements (FTAs) have brought widespread prosperity to countries throughout the

world. According to the International Trade Administration, FTAs are “one of the best ways to

open up foreign markets to U.S. exporters.” 3 Through reducing burdensome barriers to trade such

as tariffs, quotas, and government regulations, countries involved in FTAs benefit from a more

attractive environment for trade and investment, increased economic freedom, and positive

reforms for society’s benefit. A report by the U.S. International Trade Commission (USITC) found

that the joint effect of all U.S. FTAs has contributed to a 1 percent increase in GDP, or an additional

$186 billion in U.S. production.4 And the report found that the net employment gain from FTAs

was approximately 1 percent and consumers saved up to $13.4 billion in 2014 due to regional FTAs.

SECTION ONESECTION ONESECTION ONESECTION ONE

The Case for Free Trade: Essential to a Free SocietyThe Case for Free Trade: Essential to a Free SocietyThe Case for Free Trade: Essential to a Free SocietyThe Case for Free Trade: Essential to a Free Society

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The North American Free Trade Agreement (NAFTA), launched on January 1, 1994, created the

largest free trade area in the world.5 NAFTA is made up of the United States, Canada, and Mexico,

with a goal to eliminate all tariff and most non-tariff barriers among the three countries within the

first 15 years. It sought to reduce barriers to foreign direct investment, establish dispute resolution

mechanisms, create rules of origin guidelines, and protect intellectual property.

Prior to NAFTA, U.S. goods faced import tariffs and quotas when exported to Canada and Mexico.

Canada's average tariff on U.S. imports were just under 0.4 percent, but Mexico's average tariff was

much higher (almost 10 percent).6 Mexican tariffs on U.S. automobiles and light trucks were 20

percent, with tariffs on U.S. agriculture almost 11 percent. NAFTA eliminated most of these tariffs

immediately, with the rest being slowly phased out over 15 years, boosting the free flow of goods.

NAFTA increased trade among the three countries significantly, correlating with higher economic

growth. According to the Congressional Research Service, trade among the partners increased

from around $290 billion in 1993 to almost $1.1 trillion in 2016.7 Canada and Mexico are vital U.S.

trading partners, ranked first and second respectively for total U.S. exports, and accounted for 34

percent of total U.S. exports in 2016. The two countries constituted 26 percent of U.S. imports in

2016, making Canada and Mexico the second and third largest suppliers of U.S. imports.

****Compiled by MPC using data from tCompiled by MPC using data from tCompiled by MPC using data from tCompiled by MPC using data from the USITC Interactive Tariff and Trade Data Web, at http://datawev.usitc.govhe USITC Interactive Tariff and Trade Data Web, at http://datawev.usitc.govhe USITC Interactive Tariff and Trade Data Web, at http://datawev.usitc.govhe USITC Interactive Tariff and Trade Data Web, at http://datawev.usitc.gov

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1994 1998 2002 2006 2010 2014

US $ (Billions)

Figure 1. U.S. Total Goods Trade

with NAFTA Partners: 1994-2017

Total Exports Total Imports

Trade Balance

Imports

Exports

18.26

15.71

8.43

4.38

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Figure 2. U.S. Exports of Goods and

Services, by Destination, 2017

SECTION TWOSECTION TWOSECTION TWOSECTION TWO

Introduction to the North American Free Trade AgreementIntroduction to the North American Free Trade AgreementIntroduction to the North American Free Trade AgreementIntroduction to the North American Free Trade Agreement

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NAFTA has significantly benefitted the motor vehicles and parts and agriculture industries, as well

as small businesses. Since it went into effect, U.S. exports to Mexico in motor vehicles and parts

have grown by 262 percent, U.S. agricultural exports to Mexico and Canada increased by 350

percent, and Mexico and Canada have evolved into the top two export destinations for U.S. small

and medium-sized businesses.8 Cross-border investment under NAFTA has increased

significantly as well, from $126.8 billion in 1993 to $731.3 billion in 2016.9

NAFTA's effect on the U.S. economy is widely debated and difficult to quantify, but the majority

consensus is that it has had a modest positive impact on U.S. GDP. The Congressional Research

Service estimates the total increase in GDP to be less than 0.5 percent, or a few billion dollars of

added growth per year.10 Although this is relatively small compared to the size of the U.S. economy,

it is important to acknowledge NAFTA has not been detrimental to growth as critics have claimed.

According to the U.S. Chamber of Commerce, approximately 14 million jobs in the U.S. depend

on trade with Canada and Mexico.11 NAFTA has, however, resulted in job losses for certain

workers, and the gains from the agreement are not evenly distributed among industries. When

accounting for jobs created due to imports and jobs lost due to imports, NAFTA has cost about

15,000 jobs annually, but the U.S. economy has realized significant gains due to other jobs created,

higher incomes, and lower consumer prices.12 Frankel and Romer estimate that a 1 percentage-

point increase in the ratio of trade to GDP raises per capita income by between 0.5 and 2 percent.13

The Consequences oThe Consequences oThe Consequences oThe Consequences of Terminating NAFTAf Terminating NAFTAf Terminating NAFTAf Terminating NAFTA President Trump has consistently claimed that if a fair deal for the U.S. cannot be reached, he will

terminate it. A fair deal to him consists of balancing trade deficits, but whether that is a fair and

good deal for the American people is uncertain. It is likely that this is more of a negotiation tactic,

but if the U.S. wants to pull out of NAFTA, Article 2205 of the agreement allows them to do so

with a six-month notice. This could have devastating consequences for the U.S. economy, firms,

and workers. Although we believe termination is unlikely and a renegotiation will eventually come

to fruition, it is important to analyze the impacts a withdrawal would have on the U.S. economy

before addressing the renegotiation possibilities.

A handful of studies have estimated the direct costs to the U.S. in the event of a withdrawal from

NAFTA. A Business Roundtable study analyzed the impact of terminating NAFTA in the short-

term, or up to five years.14 They found that if NAFTA was terminated, U.S. real GDP would decline

between 0.6 percent annually, or $119 billion, and 1.2 percent annually, or $231 billion. U.S.

exports and imports would decline, falling 2.5-5 percent annually and 3.6-7.5 percent annually,

respectively. And the authors found the loss of jobs would be substantial, with U.S. employment

dropping by 1.8 to 3.6 million jobs, with U.S. manufacturing losing 82,000 to 157,000 jobs.

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An additional study done by Oxford Economics suggests that a U.S. withdrawal from NAFTA

would result in GDP loss of 0.5 percentage points for the U.S. and Canada, and 0.9 percentage

points for Mexico in 2019.15 The authors state that the impact on economic growth will diminish

in subsequent years for the U.S. and Canada; however, Mexico could see its economy shrink by 2

percent by 2022. Additionally, 300,000 U.S. jobs would be lost. Most importantly, the study finds

that a withdrawal would only have a modest impact on the U.S. trade deficit, a slight downtick

from 3.3 percent of GDP to 3.2 percent of GDP in 2019. Furthermore, a study done by the Petersen

Institute for International Economics suggests a U.S. withdrawal from NAFTA would result in the

loss of 187,000 jobs that rely on exports over a 1 to 3-year period.16

A decision on NAFTA is expected this year and could have profound implications for U.S. firms

and workers. The most likely scenario in our view is a renegotiation of NAFTA, rather than a

termination. This is a welcome scenario if it continues to strengthen the idea and goal of NAFTA

in the first place: to create an integrated regional economy among the U.S., Canada, and Mexico.

Unfortunately, recent rhetoric and proposals from the administration lean toward economic

nationalism and are heavily one-sided. This has the potential to backtrack the progress made since

1994, and it can have drastic effects on individuals, firms, and the overall economy.

Renegotiation needs to adhere to its original purpose: trade liberalization. Ultimately, decreasing

existing barriers to trade and addressing new developments in the economy need to be the focus

of renegotiation. This will help enhance efficiency and productivity, increase competition, and

bolster economic growth that will lead to the creation of jobs and prosperity for hard-working

Americans.

Talks of renegotiation among the U.S., Canada, and Mexico started when the Trump

Administration formally gave notice to Congress on May 19, 2017. The official objectives for

renegotiating NAFTA were released on July 17, 2017 by the U.S. Trade Representative, claiming

the new NAFTA should be modernized, continue to break down barriers to U.S. exports, and

reflect a fairer deal for America.17 The overarching goal of the administration is to revive American

manufacturing and create more jobs. The methods often touted for accomplishing this goal are

focused on reducing bilateral trade deficits with Mexico and Canada, expanding rules of origin to

require more U.S. content, and promoting “Buy American” policies, among others.

In the following section, we examine many of the principle proposals for NAFTA renegotiation by

the Trump Administration and offer our own analysis and, where applicable, alternatives.

SECTION SECTION SECTION SECTION THREETHREETHREETHREE

Goals and Strategies for a New NAFTAGoals and Strategies for a New NAFTAGoals and Strategies for a New NAFTAGoals and Strategies for a New NAFTA

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Improve the U.S. tImprove the U.S. tImprove the U.S. tImprove the U.S. trade balance and the trade deficit with NAFTA countriesrade balance and the trade deficit with NAFTA countriesrade balance and the trade deficit with NAFTA countriesrade balance and the trade deficit with NAFTA countries Seemingly the most important and controversial goal of the Trump administration is to improve

the U.S. trade balance and reduce the bilateral trade deficit the U.S. has with NAFTA countries.

The objectives proposed rely on the idea that for a trade deal to be fair, there must be reciprocity

and balanced trade. Included in the proposal is to maintain existing reciprocal duty-free access for

industrial and agricultural goods, expand competitive market opportunities for U.S. agricultural

goods in NAFTA countries, and reduce or eliminate remaining agricultural tariffs.

This proposal aligns with Trump’s view of trade surpluses as evidence of winning and deficits as

evidence of losing. Additionally, Trump believes the U.S. is getting taken advantage of by unfair

trade policies and that reducing the trade deficit through trade policy will solve the problem and

allow for the U.S. manufacturing industry to thrive again. The primary focus of the Trump

Administration is trade in goods, which fails to acknowledge that the U.S. is the leading service

exporter in the world. The U.S. has a trade deficit in goods with Mexico of $65.68 billion through

November of 2017, and according to the 2018 White House Economic Report of the President, it

actually had a trade surplus of $2.6 billion with Canada.18

Recommendation: Ignore the trade deficitRecommendation: Ignore the trade deficitRecommendation: Ignore the trade deficitRecommendation: Ignore the trade deficit

The large, persistent trade deficit in the U.S. is often cited as evidence that the U.S. has been taken

advantage of by other nations. The administration subscribes to the mercantilist fallacy that

international trade is a zero-sum game and that trade deficits serve as an “economic scorecard.”

Despite the claims from the Trump administration, a trade deficit does not reflect the strength or

competitiveness of a country, and it is certainly not a “bad thing.” A trade deficit simply means

that Americans are purchasing more goods and services from abroad than foreigners are

purchasing from U.S. businesses. Essentially, Americans are able to consume more than they

produce. The trade deficit also reflects U.S. economic hegemony and has historically signaled a

healthy and robust economy.

Restrictions on trade to address the deficit would only reduce the bilateral trade deficit with

Mexico, not the overall U.S. deficit. Additionally, they would decrease efficiency and increase the

price of inputs for producers, leading to an increase in overall prices for consumers. To adjust to

the increased costs, a shift in demand of goods produced by the NAFTA countries to goods

produced by others could occur, decreasing overall trade flows in the U.S., Canada, and Mexico.

The primary focus on the trade deficit also fails to acknowledge other important aspects of the U.S.

economy. Although the U.S. has the largest current account deficit globally, total exports and

imports hit record highs in November of 2017. The U.S. is also the second largest exporting

economy, and it is the largest service exporter in the world. Services trade in the U.S. made up 33.5

percent of U.S. exports and contributed to a surplus of $183.1 billion through the third quarter of

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2017.19 Additionally, service industries are a vital component of U.S. economic output, accounting

for 68.9 percent of economic output value added through the same time period.

Instead of focusing on the inconsequential trade deficit the U.S. has with NAFTA countries, the

strategy should be to increase trade overall by eliminating remaining restrictions. NAFTA has been

extremely successful in this regard, with trade between the three countries almost quadrupling

since inception. However, there are improvements to liberalization that can be made.

Rules of Origin: Update and strengthen the rules of origin guidelinesRules of Origin: Update and strengthen the rules of origin guidelinesRules of Origin: Update and strengthen the rules of origin guidelinesRules of Origin: Update and strengthen the rules of origin guidelines The rules of origin criteria in Chapter 4 of the agreement determines the amount of a good's value

that must originate in NAFTA countries to qualify for preferential tariff treatment. The

administration wants to update the rules of origin guidelines in NAFTA to ensure products are

genuinely made in the U.S. and North America, to incentivize the sourcing of goods and materials

in the U.S. and North America, and to establish origin procedures. This one-sided proposal has

been heavily lambasted by the Mexican Economy Minister, Canadian Foreign Minister, and auto

industry groups from each of the NAFTA countries, and is a major source of the current debate.

The main issue currently observed is with the North American content of automobiles, as U.S.

Trade Representative Robert Lighthizer stated back in August that, “Rules of origin, particularly

on autos and auto parts, must require higher NAFTA content and substantial U.S. content.”20

Currently, companies must meet the 62.5 percent North American content requirement for autos

and 60 percent for components to enter the marketplace tariff-free. This is already the highest rule

of origin globally for this sector, and some manufactures believe the current rules limit their

production in North America.21 The Trump Administration has proposed raising the NAFTA

content of autos to 85 percent and adding that 50 percent must originate in the U.S.22

Recommendation: Leave rules of origin unchangedRecommendation: Leave rules of origin unchangedRecommendation: Leave rules of origin unchangedRecommendation: Leave rules of origin unchanged

We contend that the rules of origin requirement should be left unchanged, as global supply chains

are prominent and the automobile sector already has the highest rules of origin in the world.

Increasing the NAFTA content of autos to 85 percent, as the Trump Administration has proposed,

would undermine U.S. competitiveness by increasing input costs for producers that heavily rely

on global supply chains. It could also reduce North American content as companies turn to other

countries for cheaper prices. This could lead to devastating ripple effects in the U.S. economy,

increasing prices for U.S. consumers and substantially harming investment and employment.

Digital Trade: Include guidelines on digital trade in goods andDigital Trade: Include guidelines on digital trade in goods andDigital Trade: Include guidelines on digital trade in goods andDigital Trade: Include guidelines on digital trade in goods and services and services and services and services and

crosscrosscrosscross----border databorder databorder databorder dataflowsflowsflowsflows The U.S. has proposed to restrict the use of customs duties on digital products (i.e. data and

information flows and e-commerce), to ensure non-discriminatory treatment of digital products

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transmitted electronically, and to establish rules that ensure measures that restrict cross-border

data flows are not imposed. The goal of this proposal is to enhance the ability of digital commerce

to flow freely among the NAFTA countries.

Currently, Canada discriminates against U.S. digital firms and requires local digital servers,

severely impacting the ability of U.S. firms to operate there. Custom duties on digital products also

exist, adding extra costs to e-commerce and creating a tough environment for businesses that rely

on online sales. Furthermore, restricting the free flow of data across borders hurts the U.S., which

is heavily reliant on digital trade. In fact, the U.S. is the global leader in digital trade with a $159

billion surplus, that contributes to 6 percent of GDP and employs nearly 3 million Americans.23

Recommendation: Recommendation: Recommendation: Recommendation: Liberalize the digital economyLiberalize the digital economyLiberalize the digital economyLiberalize the digital economy

Adding measures to NAFTA that liberalize the digital economy among the U.S., Canada, and

Mexico are vitally important. The world today is much different than it was when NAFTA was

implemented, with digital commerce and trade becoming increasingly important and a vital part

of the global economy. Additionally, the U.S. is the world leader in the digital economy and global

supply chains heavily depend on cross-border data flows. Enabling the ability of digital

technologies and e-commerce to thrive will greatly benefit the U.S., as well as Canada and Mexico.

Intellectual Property: Promote adequate and effective protection of Intellectual Property: Promote adequate and effective protection of Intellectual Property: Promote adequate and effective protection of Intellectual Property: Promote adequate and effective protection of IP rightsIP rightsIP rightsIP rights Promoting adequate and effective protection of intellectual property (IP) rights is a vital

component of the U.S. NAFTA renegotiation proposal. Important components of the proposal are

to implement the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights

(TRIPS), to ensure intellectual property rights are protected similarly to existing U.S. law, to

provide strong protection and enforcement for new emerging technologies, to ensure standards of

protection keep pace with technological developments, and to prevent or eliminate the

government involvement in the violation of intellectual property rights.

Secure intellectual property rights help to embolden and expand innovation, creating a robust

knowledge economy. IP rights are made up of patents, copyrights, trademarks, and trade secrets,

which provide entrepreneurs and investors with the certainty to make long-term investments.24

The U.S. Trade Representative (USTR) has recently stated that Canadian and Mexican IP laws and

enforcement fail to fully protect U.S. interests. Specifically, the USTR finds that copyright

protection and enforcement are lacking, as well as policies that address counterfeit and pirated

goods. Strengthening IP protection will ultimately help the U.S., Canada, and Mexico expand their

IP-intensive industries by assuring investors and creators that their innovations are secure.

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Recommendation: Recommendation: Recommendation: Recommendation: Expand and enforce intellectual property rightsExpand and enforce intellectual property rightsExpand and enforce intellectual property rightsExpand and enforce intellectual property rights

Expanding and modernizing the IP sector to encompass developments in the 21st century will help

encourage the growth of the knowledge economy in North America. A vital component of U.S.

strength is its IP-intensive industries, being the world’s leading innovator and largest investor in

intellectual capital than any other country. Additionally, U.S. employment in IP-intensive

industries stands at 45.5 million, accounting for $6.6 trillion in U.S. GDP and 52 percent of all U.S.

exports.25 The protection of IP is a main reason for the success of this industry, and is vital to the

expansion of jobs and investment in the U.S., Canada, and Mexico.

Energy: Preserve and strengthen investment, marketEnergy: Preserve and strengthen investment, marketEnergy: Preserve and strengthen investment, marketEnergy: Preserve and strengthen investment, market access, and stateaccess, and stateaccess, and stateaccess, and state----owned owned owned owned

enterprise disciplines benefitting energy production and transmission enterprise disciplines benefitting energy production and transmission enterprise disciplines benefitting energy production and transmission enterprise disciplines benefitting energy production and transmission The Trump Administration has proposed to maintain and improve the energy guidelines in

NAFTA. The proposal consists of further opening energy markets, supporting North American

energy security and independence, and preserving and strengthening investment, market access,

and state-owned enterprise disciplines benefitting energy production and transmission.

The goal of expanding energy guidelines is positive. Inducing an environment for the freer trade

of energy between Canada and Mexico will help the U.S. take advantage of its abundance of energy

and bolster the energy industry. Additionally, easing restrictions on energy investment in Mexico

will help to create a free and integrated North American energy market. Furthermore, the close

proximity of the three countries allows for the creation of a tightly-connected and efficient market

that helps lower the costs of production and brings lower prices and more jobs to Americans.

Recommendation: Recommendation: Recommendation: Recommendation: Expand energy guidelines to strengthen free trade in energyExpand energy guidelines to strengthen free trade in energyExpand energy guidelines to strengthen free trade in energyExpand energy guidelines to strengthen free trade in energy

The energy sector has undergone significant changes since NAFTA was implemented. Mexico has

pursued widespread energy reforms, U.S. natural gas production is booming, and oil sands

extraction has heavily increased in Canada. Free and integrated energy markets have been

established in Canada and the same should be done in Mexico, where protectionist measures

regarding energy trade are still prevalent. NAFTA should be updated to address the dramatic

changes observed in the energy climate, to liberalize Mexico's industry sector, and to promote

deeper energy cooperation among the U.S., Canada, and Mexico.

Dispute Settlement MechanismsDispute Settlement MechanismsDispute Settlement MechanismsDispute Settlement Mechanisms NAFTA offers two different methods for two different types of dispute settlement: the Chapter 11

investor-state dispute settlement (ISDS) and the Chapter 19 dispute settlement mechanism.

Investment: Eliminate Chapter 11 InvestorInvestment: Eliminate Chapter 11 InvestorInvestment: Eliminate Chapter 11 InvestorInvestment: Eliminate Chapter 11 Investor----State Dispute Settlement MState Dispute Settlement MState Dispute Settlement MState Dispute Settlement Mechanismechanismechanismechanism

The U.S. has proposed to eliminate the ISDS provisions that NAFTA currently enforces to ensure

foreign investors are not accorded greater rights than domestic investors. ISDS acts as a neutral,

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international arbitration procedure that was put in place to resolve investment conflicts, to protect

citizens abroad, and to signal to investors that the rule of law will be enforced.26 The investment

rules enforced by ISDS provide foreign investors protection from government discrimination,

expropriation, the denial of justice, and the right to transfer capital freely. Essentially, ISDS gives

foreign investors the ability to sue the government of another country through a third-party arbiter

if its actions or policies fail to meet certain standards and cause the investor economic harm.

ISDS has historically been a controversial measure of trade agreements and is progressing into a

major issue for NAFTA renegotiation. The Trump Administration, as well as critics of ISDS, claim

the mechanism affords greater protection to foreign investors than that of domestic investors.

However, Canada has demonstrated strong support for ISDS, claiming it is vital to the protection

of investors and the encouragement of investment across the three countries.

Trade Remedies: Preserve the ability of the U.STrade Remedies: Preserve the ability of the U.STrade Remedies: Preserve the ability of the U.STrade Remedies: Preserve the ability of the U.S. to rig. to rig. to rig. to rigorously enforce its trade laws andorously enforce its trade laws andorously enforce its trade laws andorously enforce its trade laws and

eliminate the Chapter 19 eliminate the Chapter 19 eliminate the Chapter 19 eliminate the Chapter 19 Dispute Settlement MDispute Settlement MDispute Settlement MDispute Settlement Mechanismechanismechanismechanism

A more radical proposal for renegotiation, and one of the main objectives for the administration,

deals with trade remedies. The U.S. wants to be able to enforce its trade laws with antidumping,

countervailing duty, and safeguard laws, eliminate the NAFTA global safeguard exclusion, and

scrap the Chapter 19 dispute settlement mechanism. The overarching goal of these measures is to

make it easier for the U.S. to restrict imports from Canada and Mexico to protect American

industries. Canada and Mexico view Chapter 19 is as a critically important component of NAFTA,

shielding them from protectionist policies implemented by the U.S. It was vital to the

implementation of NAFTA in 1994, and it is proving to be just as important in renegotiation now.

A highly controversial demand by the U.S. is to eliminate the Chapter 19 dispute settlement

mechanism. Chapter 19 is used by countries to combat against unfair antidumping and

countervailing duties. The cases are brought to a binational NAFTA panel, fully independent of

domestic courts, that evaluate the legal basis of each individual measure. Historically, Chapter 19

has benefited Canada and Mexico, with the U.S. being the target of 43 of the 71 disputes heard by

the panel.27 The most notable loss by the U.S. was a case against supposedly unfair trade practices

by Canada regarding softwood lumber.

Recommendation: Recommendation: Recommendation: Recommendation: Keep theKeep theKeep theKeep the Chapter 19 Dispute Settlement MChapter 19 Dispute Settlement MChapter 19 Dispute Settlement MChapter 19 Dispute Settlement Mechanism and eliminatechanism and eliminatechanism and eliminatechanism and eliminate the e the e the e the

Chapter 11 InvestorChapter 11 InvestorChapter 11 InvestorChapter 11 Investor----State Dispute Settlement (ISDS) provisionsState Dispute Settlement (ISDS) provisionsState Dispute Settlement (ISDS) provisionsState Dispute Settlement (ISDS) provisions

With Canada and Mexico's strong opposition to eliminating Chapter 19 and Chapter 11 from

NAFTA, we believe the U.S. should offer a compromise to keep the Chapter 19 Dispute Settlement

Mechanism if ISDS is eliminated. This would be a viable proposal to reach a middle ground and

would strengthen sovereignty and the rule of law, ensure further pursuit of liberalization, and

enable the U.S. to capitalize on its regulatory advantages.

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Chapter 19 has been a fundamental part of NAFTA’s success. It makes it difficult for governments

to enact harmful trade remedies that put a burden on taxpayers and hinder free trade. The proposal

to eliminate Chapter 19 opens the doors for restrictive measures that will result in higher consumer

prices, higher input costs, and fewer jobs. Ultimately, policies that enhance greater market access

among the three countries should always be the main goal of the agreement, and eliminating

Chapter 19 would disrupt this.

On the other hand, eliminating the Chapter 11 Investor-State Dispute Settlement (ISDS)

mechanism will be a big step in the right direction. ISDS gives foreign investors extra protection

against governments that domestic investors simply do not have and is largely unnecessary.

Disputes should be resolved in domestic courts to ensure that sovereignty and the rule of law are

upheld in each country, as well as to ensure that domestic and foreign investors are afforded equal

protection. Additionally, ISDS dissuades countries from enacting policies that further contribute

to free trade and investment due to the possibility of ISDS lawsuits. Furthermore, strong property

rights and rule of law are strengths of the U.S. that attract large flows of foreign investment to the

country. Leveling the playing field with ISDS neutralizes this advantage.

Government Procurement: Increase opportunities for U.S. firms to sell U.S. Government Procurement: Increase opportunities for U.S. firms to sell U.S. Government Procurement: Increase opportunities for U.S. firms to sell U.S. Government Procurement: Increase opportunities for U.S. firms to sell U.S.

products and services into the NAFTA countriesproducts and services into the NAFTA countriesproducts and services into the NAFTA countriesproducts and services into the NAFTA countries Aligning with Trump's protectionist agenda and nationalist rhetoric, the administration has

proposed eliminating NAFTA's procurement chapter and adding a “Buy American” provision into

the agreement. This would give preferential treatment to U.S. companies when it comes to federal

government purchases. According to the official objectives for NAFTA renegotiation, the

proposals include increasing opportunities for government contracts to U.S. firms and establishing

rules identical to existing U.S. government procurement practices.

NAFTA currently prohibits preferential treatment for U.S. companies when they bid on U.S.

government contracts, giving equal access to Canada and Mexico under the most-favored nation

treatment. The agreement essentially treats Mexican and Canadian firms as U.S. companies,

exempting them from the current Buy American law for federal purchases. The current proposal

scraps this exemption, and severely restricts opportunities for Canadian and Mexican firms to bid

on U.S. government contracts.

Eliminating the procurement chapter would allow Canada and Mexico to restrict or close off their

vital government procurement markets to U.S. firms; one that is overwhelmingly beneficial for

many U.S. companies. The U.S. Chamber of Commerce has warned against this action, citing that

it would ultimately “lead directly to reduced sales of made-in-USA products and harm the

American workers that make them.”28 They acknowledge that the current procurement rules under

NAFTA have not stopped the government from using American contractors. In fact, according to

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the Federal Procurement Data System, only 2 percent of all U.S. government contracts were given

to foreign companies in 2016. The Chamber additionally warns that scrapping the reciprocal

procurement rules would cause many U.S. companies to lose their access to valuable Canadian and

Mexican procurement markets.

Recommendation: Recommendation: Recommendation: Recommendation: Keep “Buy America” rules outKeep “Buy America” rules outKeep “Buy America” rules outKeep “Buy America” rules out

The “Buy America” government procurement rules proposed by the U.S. are very restrictive and

heavily one-sided. Instead, we would like for the agreement to continue to provide Canada and

Mexico equal access to U.S. government contracts under the most-favored nation treatment, to

embrace the integrated and regional economy NAFTA has developed. This provision has helped

promote competition for U.S. government contracts, which has limited unnecessary inefficiencies

and reduced costs for U.S. taxpayers.

Buy America policies are a form of economic nationalism that put an unfair burden on the people

they are intended to help. These rules hinder competition and reduce productivity, leading to

higher prices, lower quality goods and services, and fewer jobs for hard-working Americans.

Dixon, Rimmer, and Waschik estimate that the cost of existing “Buy America” policies are about

306,000 jobs and about $22 billion in GDP.29 There is no reason to add to this inefficiency.

Labor and Environment: Bring provisions into the core of agreementLabor and Environment: Bring provisions into the core of agreementLabor and Environment: Bring provisions into the core of agreementLabor and Environment: Bring provisions into the core of agreement The U.S. has led the way in including labor and environmental provisions in all new U.S. trade

agreements. Even though the environment and labor standards are addressed in NAFTA through

side agreements, the U.S. is proposing to bring these into the core of the agreement and make them

fully enforceable. Within the proposal, NAFTA countries would be required to adopt and maintain

internationally recognized core labor standards as recognized in the ILO Declaration, and establish

rules that enforce the adherence of environmental laws. Canada is largely on board with this

proposal; however, many Mexican political and business leaders have voiced strong opposition.

Environmental concerns are addressed in a side agreement called the North American Agreement

on Environmental Protection, coming into force the same day as NAFTA.30 This agreement

promoted cooperation and enforcement on labor and environmental concerns between the

NAFTA countries. Labor standards in NAFTA are addressed in the North American Agreement

on Labor Cooperation (NAALC). The main goal of the agreement is to improve working

conditions and living standards in the NAFTA countries and the cooperation among each. Each

country is required to have high labor standards and access to fair labor tribunals. However,

countries do not need to enforce internationally-recognized labor standards. They only have to

abide by their domestic labor laws and cannot be forced to improve their labor standards.

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The idea behind improving labor and environmental standards is to level the playing field across

the NAFTA countries, to promote improved working conditions, and to ease environmental

burdens. A nation with poor labor and environmental conditions will be able to produce products

at relatively lower costs, therefore creating a comparative advantage. This adversely effects import

competing industries in the U.S. because U.S. firms are subject to higher standards and,

correspondingly, have to pay higher wages. Additionally, companies will move to a country where

labor costs are lowest to maximize profit, which takes vital jobs away from U.S. workers.

Recommendation: Recommendation: Recommendation: Recommendation: Reduce the burden of labor and environmental regulationsReduce the burden of labor and environmental regulationsReduce the burden of labor and environmental regulationsReduce the burden of labor and environmental regulations

The goal of free trade agreements is to reduce or eliminate trade barriers, not to put unnecessary

impositions on countries to conform with the U.S. The current proposal to bring strict labor and

environmental regulations ultimately harms the domestic policy autonomy of Mexico and reduces

their comparative advantage of cheap labor that has assisted in their development. Most

importantly, increased standards are unnecessary, as The Heritage Foundation found countries

with lower trade barriers have been shown to have higher incomes and cleaner environments.31

Diversity in labor and environmental standards is widespread throughout the world and reflects

the diversity of cultural values, preferences, and economic conditions in individual countries.

Labor and environmental standards cannot and should not be universalized. Increased standards

put an undue burden on developing countries, inhibiting them from prospering from their

comparative advantages. Ultimately, labor and environmental standards should be decided

domestically so a society can maintain their freedom to choose what is best for them.

Currency: Ensure currency manipulation rules are enforcedCurrency: Ensure currency manipulation rules are enforcedCurrency: Ensure currency manipulation rules are enforcedCurrency: Ensure currency manipulation rules are enforced Absent from the current agreement, legislation was passed in 2016 which offers guidelines for a

country to be labeled a currency manipulator. The Trump Administration is proposing to add the

rules to NAFTA which would prohibit currency manipulation. The claim is that currency

manipulation is a leading avenue for countries to artificially prop up their export industries,

leading to the loss of American jobs. The administration wants to “ensure that the NAFTA

countries avoid manipulating exchange rates in order to prevent effective balance of payments

adjustment or to gain an unfair competitive advantage.”32

Recommendation: Recommendation: Recommendation: Recommendation: Prohibit currency manipulationProhibit currency manipulationProhibit currency manipulationProhibit currency manipulation

Currency manipulation is an unfair trade practice, and the proposal to add currency manipulation

guidelines is a positive development. Exchange rates have a large effect on trade and investment

flows between countries and have a large effect on trade balances. Currency guidelines should be

added to NAFTA to offer a clear definition of currency manipulation and to enforce currency rules.

This will let the free market allocate resources more efficiently.

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Recommendation: Recommendation: Recommendation: Recommendation: Say no to the Sunset ClauseSay no to the Sunset ClauseSay no to the Sunset ClauseSay no to the Sunset Clause The Trump Administration has proposed adding a “Sunset Clause” to NAFTA, which limits the

life-span of any new agreement to five years. The clause would automatically terminate the

agreement after five years if the three countries failed to come to an agreement to extend it.

Aligning with Canada and Mexico, we believe this would create an environment of uncertainty

that would dramatically inhibit investment. NAFTA currently creates a transparent environment

for investors and they rely on rules and regulations remaining the same for long time frames. A

termination clause would scare investors from long-term investments and would ultimately

threaten the economic prosperity NAFTA has created.

Adjusting the agreement to ongoing global changes could be beneficial, as long as there is no threat

of termination. Mexico, with Canada in agreement, has offered a counter-proposal to the Sunset

Clause which would evaluate the achievements and effects of NAFTA every five years.33 We

propose establishing an evaluation commitment that directly aligns with this proposal, which will

evaluate the agreement every five years to see what could be modified and improved.

NAFTA has been mostly beneficial for the U.S. by eliminating burdensome restrictions to trade

and investment and allowing Americans to have the freedom to engage in mutually-beneficial

transactions with Canada and Mexico. The current proposals by the U.S. to renegotiate the

agreement are heavily one-sided and put into question America’s adherence to free market

principles. To advance Americans’ freedom and increase individual prosperity in the U.S., NAFTA

needs to be renegotiated to further bolster the integrated, regional economy it has created.

The increasingly interconnected and globalized world means that trade is critical to domestic

economies, and free trade is more important than ever. For most in the Millennial Generation,

NAFTA has been in existence for most or even all of their lives. Millennials have experienced first-

hand the many, tremendous, and positive economic impacts of the agreement. Luckily, the

generation today finds itself on the cusp of a modernized and expanded NAFTA – one that meets

today’s technology and social needs more effectively and achieves even greater prosperity. So

much of the Millennial Generation’s economic prospects rely upon keeping, updating, and

improving the trade agreement. We hope policymakers vigorously pursue this agenda.

SECTION SECTION SECTION SECTION FOURFOURFOURFOUR

Preserving and Modernizing NAFTAPreserving and Modernizing NAFTAPreserving and Modernizing NAFTAPreserving and Modernizing NAFTA for a New Generationfor a New Generationfor a New Generationfor a New Generation

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1 “Free Trade.” Encyclopedia Britannica, Encyclopedia Britannica, Inc., 17 Jan. 2014,

www.britannica.com/topic/free-trade. 2 Froning, Denise. “The Benefits of Free Trade: A Guide for Policymakers.” The Heritage Foundation,

2000, www.heritage.org/trade/report/the-benefits-free-trade-guide-policymakers. 3 Free Trade Agreements, International Trade Administration, www.trade.gov/fta/. 4 “Economic Impact of Trade Agreements Implemented Under Trade Authorities Procedures, 2016

Report.” www.usitc.gov/publications/332/pub4614.pdf. 5 “North American Free Trade Agreement (NAFTA).” North American Free Trade Agreement (NAFTA)

| U.S. Customs and Border Protection, www.cbp.gov/trade/nafta. 6 Villarreal, M. Angeles, and Ian F. Fergusson. “The North American Free Trade Agreement (NAFTA).”

www.fas.org/sgp/crs/row/R42965.pdf. 7 Villarreal, M. Angeles, and Ian F. Fergusson. “The North American Free Trade Agreement (NAFTA).”

www.fas.org/sgp/crs/row/R42965.pdf. 8 The Facts on NAFTA: Assessing Two Decades of Gains in Trade, Growth, and Jobs. U.S. Chamber of

Commerce, 8 Mar. 2017, www.uschamber.com/report/the-facts-nafta-assessing-two-decades-gains-trade-

growth-and-jobs. 9 Bovino, Beth Ann. “Killing NAFTA Would Hurt the U.S. Economy and American Manufacturers.” S&P

Global, 8 Nov. 2017, www.spglobal.com/our-insights/Killing-NAFTA-Would-Hurt-The-US-Economy-

And-American-Manufacturers.html. 10 Villarreal, M. Angeles, and Ian F. Fergusson. “The North American Free Trade Agreement (NAFTA).”

www.fas.org/sgp/crs/row/R42965.pdf. 11 The Facts on NAFTA: Assessing Two Decades of Gains in Trade, Growth, and Jobs. U.S. Chamber of

Commerce, 8 Mar. 2017, www.uschamber.com/report/the-facts-nafta-assessing-two-decades-gains-trade-

growth-and-jobs. 12 Hufbauer, Gary Clyde, et al. NAFTA at 20: Misleading Charges and Positive Achievements. Petersen

Institute for International Economics, 2014, NAFTA at 20: Misleading Charges and Positive

Achievements, www.piie.com/sites/default/files/publications/pb/pb14-13.pdf. 13 Frankel, Jeffrey A., and David Romer. “Does Trade Cause Growth?” The American Economic Review,

June 1999. 14 Francois, Joseph F., and Laura M. Baughman. Terminating NAFTA: The National and State-by-State

Impacts on Jobs, Exports and Output. Business Roundtable,

2018, https://businessroundtable.org/sites/default/files/NAFTA%20Termination%20Impact%20FINAL_0

.PDF. 15 Webber, Jude. “Subscribe to the FT to Read: Financial Times Nafta Withdrawal Would Hit US GDP

without Helping Trade Deficit – Report.” Financial Times, 15 Jan. 2018, www.ft.com/content/b0f343aa-

ab3a-3657-8b57-f0086cfaa006. 16 Robinson, Sherman, et al. “Withdrawing from NAFTA Would Hit 187,000 US Exporting Jobs, Mostly

in Heartland.” PIIE, 15 Feb. 2018, www.piie.com/blogs/trade-investment-policy-watch/withdrawing-

nafta-would-hit-187000-us-exporting-jobs-mostly#_ftn3. 17 Summary of Objectives for the NAFTA Renegotiation. United States Trade Representative,

2017, www.ustr.gov/sites/default/files/files/Press/Releases/NAFTAObjectives.pdf.

ENDNOTESENDNOTESENDNOTESENDNOTES

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18 United States. President (2016-2020: Trump). Economic Report of the President: Together with the

Annual Report of the Council of Economic Advisors. Washington D.C. February 2018. 19 Ibid. 20 Lawder, David. “Auto Groups Side with Canada, Mexico on NAFTA Origin Rules.” Reuters, Thomson

Reuters, 17 Aug. 2017, www.reuters.com/article/us-trade-nafta-autos/auto-groups-side-with-canada-

mexico-on-nafta-origin-rules-idUSKCN1AX2R9. 21 Murphy, John. “Statement of the U.S. Chamber of Commerce on NAFTA Negotiations.” Received by

Office of the U.S. Trade Representative and the Trade Policy Staff Committee, U.S. Chamber of

Commerce, 2017,

www.uschamber.com/sites/default/files/us_chamber_priorities_for_nafta_modernization.pdf. 22 Lawder, David. “Auto Groups Side with Canada, Mexico on NAFTA Origin Rules.” Reuters, Thomson

Reuters, 17 Aug. 2017, www.reuters.com/article/us-trade-nafta-autos/auto-groups-side-with-canada-

mexico-on-nafta-origin-rules-idUSKCN1AX2R9. 23 Modernizing NAFTA for Today's Economy. Internet Association, www.internetassociation.org/wp-

content/uploads/2017/06/Modernizing-NAFTA-White-Paper.pdf. 24 Murphy, John. “Statement of the U.S. Chamber of Commerce on NAFTA Negotiations.” Received by

Office of the U.S. Trade Representative and the Trade Policy Staff Committee, U.S. Chamber of

Commerce, 2017,

www.uschamber.com/sites/default/files/us_chamber_priorities_for_nafta_modernization.pdf. 25 Ibid. 26 FACT SHEET: Investor-State Dispute Settlement (ISDS). Office of the United States Trade

Representative, Mar. 2015, www.ustr.gov/about-us/policy-offices/press-office/fact-

sheets/2015/march/investor-state-dispute-settlement-isds. 27 Dattu, Riyaz, et al. “International Trade Brief: Trump Administration Takes Aim at Chapter 19 of

NAFTA, U.S. Wish List for NAFTA Renegotiations and More.” Osler, Hoskin & Harcourt LLP, Osler, 6

Apr. 2017, www.osler.com/en/resources/cross-border/2017/international-trade-brief-trump-

administration-ta. 28 Murphy, John. “Statement of the U.S. Chamber of Commerce on NAFTA Negotiations.” Received by

Office of the U.S. Trade Representative and the Trade Policy Staff Committee, U.S. Chamber of

Commerce, 2017,

www.uschamber.com/sites/default/files/us_chamber_priorities_for_nafta_modernization.pdf. 29 Dixon, Peter B., et al. Macro, Industry and Regional Effects of Buy America(n) Programs: USAGE

Simulations. Victoria University, 2017, www.copsmodels.com/ftp/workpapr/g-271.pdf. 30 Villarreal, M. Angeles, and Ian F. Fergusson. “The North American Free Trade Agreement (NAFTA).”

www.fas.org/sgp/crs/row/R42965.pdf. 31 Riley, Bryan. “2018 Index of Economic Freedom: Freedom to Trade Is a Key to Prosperity.” The

Heritage Foundation, 2017, www.heritage.org/trade/report/2018-index-economic-freedom-freedom-

trade-key-prosperity. 32 Summary of Objectives for the NAFTA Renegotiation. United States Trade Representative,

2017, www.ustr.gov/sites/default/files/files/Press/Releases/NAFTAObjectives.pdf. 33 Esposito, Anthony, and David Ljunggren. “Canada Open to Mexico Five-Year NAFTA Review

Proposal: Sources.” Reuters, Thomson Reuters, 16 Nov. 2017,

https://mobile.reuters.com/article/amp/idUSKBN1DG1ZV.

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