When the North American Free Trade Agreement (NAFTA) came into force in January 1994, it was a groundbreaking achievement. It eliminated nearly all tariffs among three significant trading partners and achieved liberalization on a wide range of other issues (some of which had never before been included in trade agreements).
NAFTA has brought great benefits to all three countries, and these achievements should not be rolled back. Currently, Canada and Mexico are the destination for 34 percent of all U.S. exports, and the U.S. remains the largest single source of foreign direct investment into both Canada and Mexico.
Despite what its critics claim about job losses, a 2016 report by the U.S. International Trade Commission stated that NAFTA has had “a small increase in U.S. welfare” and “little to no change in U.S. aggregate employment.”
Nonetheless, the United States, Canada, and Mexico are about to begin an historic renegotiation of NAFTA, and we must be wary of injecting the poison pill of protectionism into the new NAFTA.
That is not to say that NAFTA is without its problems. There are three main ways that NAFTA can be improved.
1. NAFTA does not address many of the e-commerce issues that are now central to international trade. NAFTA was enacted when came into force when Facebook CEO Mark Zuckerberg was nine years old. As part of the NAFTA renegotiation, e-commerce provisions should be updated.
2. As NAFTA has been implemented, certain flaws have been exposed. Specifically, the core dispute provision (Chapter 20), which lets governments bring complaints when they believe another government is violating the rules, has not functioned. New rules are needed to ensure that complaints are heard. Two other specialized dispute procedures on investment rules (Chapter 11) and review of anti-dumping countervailing duties (Chapter 19), could use another look as well, and possibly some amendments, as these provisions have raised concerns about the proper role of international courts and the balance between international and domestic power.
3. NAFTA got rid of tariffs on most goods, but there were a few exceptions. The renegotiation effort could and should address these protectionist barriers.
Renegotiation presents the opportunity to modernize, fix, and expand the rules of NAFTA, and produce a “freer” free trade agreement, which would be good for the North American economy.
The Trump administration has the chance to begin a constructive renegotiation that would enhance North American liberalization and competitiveness, by tackling the remaining barriers to trade and investment on this continent. They should not waste this great opportunity.