NAFTA 2.0 – Is Hope a Sound Negotiating Strategy?

  • National Newswatch

MEXICO CITY – Why have I put the NAFTA 2.0 negotiations on Deathwatch? Why not wait a bit longer? Passage of tax legislation may change the negotiating environment. Congress is on our side. Why declare a Deathwatch?From the outset Canada's and Mexico's best option was to hope for the best and prepare for the worst. I have not given up on hope, but we must accept that hope is not a sound business or negotiating strategy.The great gains in trade liberalization have been tied to foreign policy imperatives and a desire to improve the lot of the world's poorest people. Until recently the United States provided the leadership which permitted these initiatives to become reality. There are big shoes to be filled and no apparent candidates to fill them.Enhancing and spreading global prosperity through open markets was a broadly supported goal. It took many years to include agriculture in the quest for open markets. The sensitivities underlying the resistance remain.There were problems, like trade in textiles and clothing starting in the 1950s which resisted trade liberalization. Global overcapacity and abnormally low costs which led to market disruption were addressed by very narrowly defined derogations – a series of textile agreements culminating with the Multi-Fibre Agreement (MFA) in 1973.The foreign policy implications of the effort to save textile and apparel industry jobs in Europe and North America, while leaving scope for developing countries to capitalize on their advantages, left policy space for protectionism in the form of managed trade.The Gordian knot of the MFA negotiations was resolved by a phone call between Henry Kissinger and French President Georges Pompidou while the negotiators waited patiently.It was a different world – key issues were addressed by a small drafting group comprised of two members each from seven developing countries and seven industrialized countries. Major issues were resolved in a few days.The WTO system has become less manageable – because there are many more countries still trying to operate on a consensus basis. The foreign policy imperatives have been replaced by a fall back to unenlightened mercantilism.Many of the poor developing countries have become industrial tigers – complete with impressive skylines and healthy sovereign wealth funds. All of the least developed countries benefit from essentially duty free trade. Unfortunately, many lack the industry and infrastructure to really benefit from their duty free, quota free access.The last successful major multilateral trade liberalization initiative was the Uruguay Round. It created the World Trade Organization with some 164 members. Multilateralism has become too cumbersome. It does not work. Washington has given up on the WTO.The WTO needs leadership. Don't expect it from the current resident of 1600 Pennsylvania Avenue. There is no patience for nor benevolence towards free riders. As far back as the Kennedy Round, Canada was labelled a “free rider” by USTR Harald Malmgren. Canada's sin was not accepting the full formula tariff cut. There was no credit given for Canada adopting an injury test in its trade remedy system. Ambassador Malmgren wanted to ensure that reciprocity was truly reciprocal and that Canada did not show up like Oliver Twist, looking for special treatment in the Tokyo Round.U.S. policies and initiatives are developed with an eye on the 2020 election. If it worked as a promise in 2016 why not try to deliver?Negotiations under the Trump Administration have become a cold-hearted business. Both President Trump and Secretary Ross have built their fortunes on the backs of companies in distress. There is no pity in their DNA. The balance sheet is their bible. They understand negotiating but diplomacy is lost on them. President Trump understands leverage and will do everything possible to maximize it. In state-to-state negotiations the leverage is more accurately described as duress. No one likes to negotiate under duress.Targets of U.S. rebalancing efforts must understand their U.S. opponents and what makes them tick. The U.S. has a rich trade history and Ambassador Lighthizer is an historian. Successful Trade Remedy and Textile practitioners must ensure they understand everything about their opponent. Don't mistake a tough, well prepared opponent for a bully.Under the Trump Administration, trade and economic policy has become more isolationist. The U.S. border has become a tollgate. Ambassador Lighthizer insists he is seeking reciprocity, but is it the same type of reciprocity envisaged in the Reciprocal Trade Agreements Act (RTAA) of 1934, which Washington introduced to lead the world out of the Great Depression?The RTAA was designed to undo some of the worst evils of the Smoot-Hawley Tariff Act of 1930. The reciprocity in the 1934 Act encouraged extension of benefits among many countries on a Most Favoured Nation basis. Multilateral balancing of reciprocal benefits was the objective. Bilateral balancing was irrelevant to this initiative.Congressional passage of agreements under the RTAA required only a simple majority support for passage. Raising tariffs required a two-thirds majority – making the deals much harder to undo.Trade liberalization became an integral part of U.S. foreign policy, particularly after World War II. Trade liberalization was an important complement to the Marshall Plan – and later in competition with the Soviet Union for the hearts and minds of emerging countries.The foreign policy imperatives are no longer as important as they were but China and the Regional Comprehensive Economic Partnership (RCEP) could yet give Washington good reason for a return to open-minded and even-handed benevolence.Trade negotiators must be optimists. Who would volunteer for a life of frustration? Hope is not enough to carry them through to success. Hard work will lead to an agreement if both sides want it.The Canada-E.U. Comprehensive Economic and Trade Agreement (CETA) took a long time to negotiate. Arguably, on a plain reading of the test, the E.U. did better than Canada. Canada needed the deal more than Europe did. Canada was prepared to take a long term view – instead of focusing on the prospects for the next calendar quarter or two.The Doha Round started for the wrong reasons with an agenda Congress would not/could not accept. It was doomed, if not from the start, from the Cancun Ministerial when India and Brazil led the charge for more inclusive management of the WTO system.After the 2003 Cancun Ministerial, most trade liberalization efforts shifted towards bilateral and plurilateral agreements which were open to expansion to new members.The U.S. is not a nation of protectionists. There are particular problems like steel which are amazingly similar to the market disruption experienced by global textile and apparel markets 50 years ago. Jobs have been falling in more traditional manufacturing industries. Arguably, manufacturing jobs in many markets would have declined with or without trade liberalization.Investment and job location issues are the driving forces behind the current NAFTA rebalancing initiatives. President Trump is trying to roll back the clock to better days for workers in U.S. manufacturing industries, but NAFTA is not the problem. Starting the rebalancing with NAFTA was a miscalculation – like as if the U.S. had declared war on Bulgaria in 1941.But NAFTA is first and we need to cope with that reality.Canada and Mexico have friends in Congress and in statehouses across the U.S. The farm belt generally supports NAFTA. No doubt our friends will urge the Administration to recognize the risks of their tactics for U.S. exports.I hope that my very optimistic friends are correct when they urge patience because of:
  • support from the U.S. business community;
  • support from virtually all of the U.S. agricultural sector, farmers and ranchers who are increasingly dependent on exports;
  • support from influential members of Congress who understand and abhor the dangers of isolation and protectionism;
  • passage of legislation to implement President Trump's tax policies;
Will these factors combine to inject sufficient reason and common sense into the U.S. NAFTA Strategy?These factors should have helped to achieve some degree of consensus already. Are our friends too late? Will they be able to overcome America First, Buy American, Hire American policies?That makes hope a very important element of the optimists' strategy. I can recall watching dozens of Saturday matinees where the day was saved by the last minute arrival of the cavalry.True, help never reached the Alamo – but there are signs that Lighthizer and Trump also have a battle of the Congressional front to cope with.Congress is looking for facts and research to support U.S. positions, facts and research which do not exist. Congress will not buy a pig in a poke.Nor will it react benignly to its trading partners refusing to engage in negotiations which could benefit Americans.The negotiators have dug themselves into holes by repeating entrenched positions.The prospect of termination makes Canada and Mexico unwilling to move first as any resumption would begin with what had already been conceded.There will be concerns that the first mover will be the loser.Negotiating publicly about numbers is problematic. It is too easy to label sides 'winners' and 'losers'. The balance will be comprised of many concessions and gains. So, avoid the numbers.I believe that the U.S. wants to negotiate and that Ambassador Lighthizer will measure his success by delivering a deal. He knows that the best deals are unsatisfactory.The cheerleader in the White House does not make this easy. There is a deal that can be done. If the North American neighbours cannot do it, who can?The negotiators, all of them, need to step back and spend more time on packaging and showing they mean they are determined to reach a win, win, win conclusion.The current path of the negotiations is going nowhere fast. I will not call off my Deathwatch.I won't ask POTUS or the other leaders to park their egos. But a change in tone is badly needed or there will be an incredible amount of harm looking for someone to blame.There is hope that situations and circumstances will combine for a more favourable negotiating environment. But hope alone is not a sound negotiating strategy. It must be combined with common objectives and hard work.Peter Clark, president of Grey, Clark, Shih and Associates, is one of Canada's leading international trade strategists. His clients in Canada and around the world include governments, corporations and trade associations. He is a frequent media commentator and columnist.  Follow him on Twitter at @jpclark14