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  May 21st, 2017 | Written by

NAFTA 2.0 and the Art of the Deal

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  • Modernizing and updating NAFTA is a worthwhile objective.
  • For more than two decades, businesses large and small have organized themselves according to NAFTA.
  • The three NAFTA economies should make it clear they are invoking Article 2202 to improve the agreement.

During the‭ ‬2016‭ ‬campaign,‭ ‬Donald Trump repeatedly and harshly criticized the‭ ‬23-year old North American Free Trade Agreement‭ (‬NAFTA‭)‬.‭ ‬Last month,‭ ‬the Washington Post reported that President Trump was set to announce withdrawal from the agreement.‭ ‬Members of Congress,‭ ‬his own cabinet officers,‭ ‬and leaders from agriculture and business urged him not to do so.‭ ‬Ultimately,‭ ‬the President decided to renegotiate,‭ ‬not terminate,‭ ‬NAFTA.

Is renegotiating NAFTA a good idea‭? ‬It depends what you are trying to accomplish.‭ ‬No agreement is perfect,‭ ‬and commerce has changed markedly since‭ ‬1994‭—‬for example,‭ ‬when NAFTA entered into force,‭ ‬there was no commercial use of the internet.‭ ‬Modernizing and updating the agreement is a worthwhile objective.‭ ‬Yet trade agreements are typically effect,‭ ‬not cause:‭ ‬nations make agreements because existing commercial relationships are important,‭ ‬not the other way around.‭ ‬Overall,‭ ‬NAFTA has helped to triple merchandise trade among the three economies in nominal terms,‭ ‬from‭ ‬$306‭ ‬billion in‭ ‬1993‭ ‬to just over‭ ‬$1‭ ‬trillion in‭ ‬2015.‭ ‬But it’s important to remember that Canada and Mexico were the United States‭’ ‬number‭ ‬1‭ ‬and number‭ ‬3‭ ‬trading partners respectively before NAFTA,‭ ‬and they hold the same rank today.

Protect the Downside
As the President engages with Congress and the public on a renegotiated NAFTA,‭ ‬he may find it useful to consider some advice he once provided to others.‭ ‬In‭ ‬1987,‭ ‬Mr.‭ ‬Trump and Tony Schwartz produced Trump:‭ ‬The Art of the Deal,‭ ‬a business advice book which reached number‭ ‬1‭ ‬on the New York Times best seller list.‭ ‬The book contains an‭ ‬11-step formula for success.‭ ‬Step‭ ‬2‭ ‬has particular relevance in this case:‭ “‬protect the downside,‭ ‬and the upside will take care of itself.‭”

Why is this step so important in the context of NAFTA‭? ‬Because for more than two decades,‭ ‬businesses large and small have organized themselves according to the NAFTA rules.‭ ‬Discarding the existing rules could upend these networks and disrupt patterns of voluntary,‭ ‬mutually beneficial exchange.‭ ‬Businesses would be forced to pull back from longtime partners and scramble to find new workers,‭ ‬new suppliers,‭ ‬and new markets.‭ ‬The degree of disruption from re-introducing trade restrictions would be substantial,‭ ‬and the loss of stability and predictability would raise costs and stifle investment.‭ ‬These kinds of results are not in line with a principle of‭ “‬protecting the downside.‭”

North America is a Commercial Ecosystem
North America is an enterprise,‭ ‬a commercial ecosystem that spontaneously organized over many business cycles by millions of actors and assisted by stable rules.‭ ‬Destroying these rules would be the economic equivalent of a forest fire.‭ ‬Maybe we would be better off if we stop thinking of NAFTA as a trade agreement—which leads us to consider how much we sell to each other—and instead see it as a production agreement.‭ ‬North America is a place where‭ ‬460‭ ‬million people make things together,‭ ‬which we then sell to each other and the rest of the world.‭ ‬Consider the electric power grid—a sector not covered by NAFTA,‭ ‬yet one where national boundaries are irrelevant.‭ ‬Or,‭ ‬imagine the automobile industry viewed from space:‭ ‬it would be easy to find Interstate‭ ‬75‭ ‬and Canada’s Highway‭ ‬401,‭ ‬but not a national border.‭ ‬That’s the real NAFTA,‭ ‬and the downside risks associated with disruption definitely need to be managed.

Agree to Agree
Is there a way to improve NAFTA without setting fire to the ecosystem‭? ‬Yes.‭ ‬NAFTA itself provides for just such a process in its Article‭ ‬2202,‭ ‬which states:

1.‭ ‬The parties may agree on any modification of or addition to this Agreement.

2.‭ ‬When so agreed,‭ ‬and approved in accordance with the applicable legal procedures of each Party,‭ ‬a modification or addition shall constitute an integral part of this Agreement.

Leaders of the three economies should make it explicit that they are invoking Article‭ ‬2202‭ ‬to improve the agreement.‭ ‬This would send a clear signal that the NAFTA as implemented would remain in force until such a time when the parties complete negotiations and,‭ ‬in the case of the United States,‭ ‬when the Congress adopts implementing legislation.‭ ‬This approach offers a clear path toward acting on the Art of the Deal’s rule number two,‭ ‬and provides the stability North American businesses,‭ ‬farmers,‭ ‬and workers count on today.‭ ‬With this assurance,‭ ‬the president and his team should work to build public support for his negotiating agenda.

Scott Miller is a senior adviser and holds the William M.‭ ‬Scholl Chair in International Business at CSIS.‭ ‬Previously,‭ ‬Miller was director for global trade policy at Procter‭ & ‬Gamble.