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  July 31st, 2017 | Written by

NAFTA Renegotiation: Knock Off Obsession With Deficits

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  • Trade barriers between the US and Canada still exist.
  • A new NAFTA agreement holds the potential for fresh liberalization of US-Canada trade.
  • Benefits of new NAFTA will be forgone if Trump insists on one-sided concessions from Canada.

The trade policies of previous US administrations of both parties has been to reduce and remove barriers to trade and investment during negotiations.

The Trump administration’s policy departs from this approach, focusing instead of reducing deficits with trading partners and adopting mirror-image policies on tariffs, quotas, and border taxes. Trump’s concept of fairness dictates whether the president believes a given trade deal is good or bad.

How might this approach impact the administration’s NAFTA renegotiation efforts? A recent paper from the Peterson Institute for International Economics, authored by scholars Gary Clyde Hufbauer and Euijin Jung, examines how the Trump approach might hurt negotiations with Canada.

Trump’s understanding what what makes for a good trade deal would put the US trading relationship with Canada in the good column, at lease when it comes to balances and deficits. Two-way US trade with Canada, approaching $700 billion, “is practically balanced,” the paper noted, and, if energy trade is excluded from the tally, the United States enjoyed a goods and services trade surplus with Canada in 2016.”

NAFTA zeroed out almost all tariffs on three-way trade between the US, Canada, and Mexico, which Trump would appreciate for its reciprocity. But Canadian and Mexican border adjustment taxes would fail that test because the US does not impose this form of value-added tax (VAT) on imports. The Canadian goods and services tax (GST) stands at 13 percent while the Mexican VAT is 16 percent.

Reciprocity would presumably have the US call for Mexico and Canada to stop imposing taxes at their borders or for the US to adopt a border adjustment tax (BAT) itself.

Some congressional Republicans advocate just such a tax, as part of a broader corporate tax reform program. The Trump administration has been non-committal but whether it will support a BAT if it ever gets serious consideration in Congress. According to the Peterson paper, Trump has specifically complained about Mexico’s VAT, while refraining from bashing Canada’s GST.

The Trump approach will miss out on opportunities to further liberalize trade between the US and Canada, the paper argues. There remain Canadian measures that discourage US exports and the same goes for the US when it comes to Canadian exports. Canada retains barriers to agriculture, intellectual property rights, services, investment, and crossborder data flows, while the US has imposed protective measures softwood lumber, beef, and government procurement that irk the Canadians.

If reciprocity is the goal, the Canadians could point to the non-energy US trade surplus with Canada as a reason for retaining protections from US competition for certain sectors.

The point is that since trade barriers between the US and Canada still exist, “a new agreement holds the potential for fresh liberalization,” the paper concludes. “The benefits from mutual reforms will be forgone, however, if Trump insists on extreme and one-sided concessions from Canada.”

To further liberalize trade between the US and Canada “the Trump trade team should drop its obsession with trade deficits…,” the paper advises, “and instead enhance NAFTA through fresh and reciprocal trade liberalization.”