The office of the U.S. Trade Representative recently held a marathon three-day hearing to discuss the future of the North American Free Trade Agreement (NAFTA) in the Trump era. This effectively began the process of renegotiating one of our most important and controversial trade pacts.
To say NAFTA has been a political lightning rod would be an understatement. On the campaign trail, Trump wasted no opportunity to trash the pact, at one point saying, “NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.”
Many free traders hoped that Trump’s anti-trade rhetoric would be tempered when he assumed office. Such was the case with President Obama, who called NAFTA a “big mistake” on the campaign trail, only to later adopt a much friendlier approach to trade. His administration even negotiated the Trans-Pacific Partnership — a trade deal that included the U.S., Mexico and Canada. Had that deal been adopted, it would have supplanted and updated many sections of NAFTA.
Unfortunately, President Trump does not appear to be following the same pattern as his predecessor. In addition to taking steps to renegotiate NAFTA, the administration has engaged in several smaller, yet still troubling trade spats that have strained economic relationships in North America.
For instance, frustrations over access to Canadian dairy markets led to the administration retaliating with a hefty 20-percent tariff on Canadian softwood lumber, a key product for home building. This could significantly increase the price of new homes, as the cost of lumber accounts for about 17 percent of the construction cost of the average house, according to data from the National Association of Home Builders.
Tensions have increased further due to a recent spat between U.S.-based Boeing and the Canadian company Bombardier. Boeing has alleged it is being harmed because Bombardier is dumping its aircraft in the United States. This is a peculiar claim because the dispute centers around a Bombardier airplane in a class where Boeing manufactures no competing products.
Nonetheless, the U.S. Commerce Department is currently reviewing Boeing’s request for duties and is expected to issue a ruling in September. This could raise the price of aircraft and, subsequently, result in higher prices for airline passengers.
Things are escalating even further now that the Trump White House is reportedly considering hefty tariffs on imported steel and aluminum. The exact size and scope of these tariffs — which almost comically are being suggested in the interest of national security — remains unclear. Yet, Canada, which is our largest source for imported steel, is far from pleased with the threat and currently pursuing an exemption.
The economic implications of these tariffs are enormous, as steel and aluminum are essential for the manufacturing of everything from automobiles to beer cans. Consumer prices could skyrocket if the administration puts these taxes into effect.
These are troubling times when it comes to free trade, broadly, and our critical relationship with our North American neighbors, specifically. The worsening climate will only make NAFTA renegotiation more difficult. Still, if done properly, this process could be beneficial to all three nations. That would require the Trump administration to approach the process with several key priorities in mind.
First, NAFTA renegotiation must not result in any new tariffs on imports or exports. One of NAFTA’s crowning achievements was phasing out virtually all tariffs between the three countries. Moving in the opposite direction would be harmful to American businesses, consumers and taxpayers. Particularly problematic is the fact that import tariffs are almost always regressive in nature, meaning that lower-income Americans would be hit the hardest.
Second, the Trump administration should push to reduce non-tariff barriers to trade. This means working to open up Canada’s highly protected dairy market and liberalize Mexico’s protectionist sugar and energy policies. These will not be easy tasks and will arguably be more difficult in a trilateral arrangement than they were in the multilateral Trans-Pacific Partnership process.
Finally, it’s imperative for the administration to recognize the vital importance of a strong relationship between the three nations. In an economic sense, Canada and Mexico are our largest trading partners and 14 million U.S. jobs are directly dependent on these relationships.
Outside the economic realm, Canada and Mexico are important allies in geopolitical affairs. NAFTA renegotiation is about far more than economic growth and job creation. The stakes are extremely high, and it’s essential that this enormous undertaking leads to a stronger, more prosperous integrated relationship with our neighbors to the north and south.
Brandon Arnold is the executive vice president of the National Taxpayers Union, which supports lower taxes and smaller government at all levels, and the National Taxpayers Union Foundation. He has testified on fiscal policy before Congress and numerous state legislative committees, and has appeared on several television and radio networks, including C-SPAN, Fox News, Fox Business, BNN, and Russia Today. Previously, he was director of government affairs at the Cato Institute and a research analyst at the National Republican Senatorial Committee. Follow him on Twitter @BrandonNTU.