Renegotiation of NAFTA by the U.S., Canada, and Mexico has foundered because the U.S. presented demands that may shake the very foundation of the agreement and threatened to withdraw if its demands are not met.
NAFTA has played an important role in the North American economy. The Trump administration should change its posture that endangers the very existence of this framework.
President Donald Trump pledged in the presidential election campaign last fall to renegotiate or withdraw from NAFTA, claiming this agreement undermines the U.S.’s trade balance and employment. The present negotiations started in light of this pledge and the U.S. side has presented very tough demands.
One of them is to tighten rules of origin regulations. The U.S. is demanding that tax exemption for cars imported from the NAFTA area should only apply if 85% of parts, up from the present 62.5%, are procured within NAFTA and at least 50% of parts are made in the U.S.
Automakers, including U.S. makers, have been able to manufacture quality products at low cost through the extensive network of parts suppliers within NAFTA, and this has contributed to growth in automobile production and consumption in the region. If the U.S. demands are accepted, this will fragment the supply network and undermine the merits of the North American market as a production base.
The U.S. is also demanding the abolition of arbitration by bilateral panels for trade dispute settlement on the grounds that many rulings have been disadvantageous to the U.S. It also demands a sunset provision that states that NAFTA will automatically cease to be in effect if not renewed in five years.
These are all one-sided demands that might result in the emaciation of NAFTA. While some see this as a Trump-style negotiation tactic of taking a tough stance to press for concessions, if the U.S. continues to use the enormous U.S. market to intimidate, its relationship of trust with Mexico and Canada may collapse.
The weakening and disintegration of NAFTA will only hurt the U.S. economy. The U.S. industrial sector, members of the ruling Republican Party, and other politicians should strongly urge the administration to change its policy.
The outcome of NAFTA renegotiation will also have a major impact on Japanese companies doing business in North America. They may be forced to rethink their strategy. The U.S. has also sounded out Japan on the conclusion of a bilateral free trade agreement (FTA). The U.S. administration’s “America First” negotiating posture even when dealing with friendly nations is indeed a cause of concern for Japan.