Trump Says He Wants to Renegotiate Trade Deals. But What Does That Mean?

March 23, 2017

This week, Trump administration officials said they would prepare an executive order reviewing all U.S. trade deals. This would make good on Trump’s campaign pledge to push an overhaul of trade deals ranging from the 1993 North American Free Trade Agreement (NAFTA) to the 2016 Trans-Pacific Partnership (TPP), the latter of which Trump pulled the U.S. out of during his first week in office. News reports indicate that the administration has prepared a “Key Elements of a Model Trade Agreement” wish list document, which contains “more than 20 foreign trade practices it would like to address in a renegotiation of NAFTA and in any bilateral trade deal it might pursue.” (A version of this document circulating online indicates these range from fundamental governance questions like labor rights, to more parochial issues like timber prices. However, what precisely the administration aims to pursue in these issue areas is not clear, and its responses to senators’ questions commit to little in the way of specifics.)

Is renegotiation even possible?

Yes. The U.S. is party to 14 major trade agreements, ranging from the relatively simple (the 19-page U.S.-Jordan agreement) to the complex (393-page NAFTA).[1] These deals do not all follow a similar template. For example, 10 of the deals include investor-state dispute settlement (ISDS), which allows foreign companies to sue host countries over domestic regulations.[2] The others, like the U.S.-Australia deal, don’t.[3] But one thing they have in common is that the parties to the agreement can amend them at will, so long as they write their agreements down and follow domestic legal procedures.

The U.S.’s Bipartisan Congressional Trade Priorities and Accountability Act of 2015 allows the executive branch to push deals (and renegotiated deals) through Congress on a fast track. To qualify for this arrangement, Trump would have to give Congress 90 days’ notice of his intention to begin negotiations, and list his objectives in doing so. So, if Trump gave notice today, March 23, the earliest date he could start formal talks would be Wednesday, June 21 (a month and half past the promised first 100 days). (News reports indicate the administration has a draft of this notice ready to go.) After negotiations were through—which could take years—Trump would again have to give Congress 90 days’ notice before signing a new deal (and make the deal’s text available to the public at least 60 days before). He would then have a similar gap between when he could introduce implementing legislation to Congress and when Congress would have to vote yea or nay, without normal amendment and parliamentary procedures.

What are the opportunities for renegotiation?

Trump is not alone in wanting to see changes to trade agreements.

Liberal groups like the AFL-CIOSierra Club, and Citizens Trade Campaign see substantial potential in NAFTA renegotiation. For instance, they critique the ISDS provisions noted above and urge their elimination. They and domestic manufactures have called for changes to the pacts’ “rules of origin,” which determine how much of a product’s value added has to come from within NAFTA countries. However, as Rep. Sander Levin (D-Mich.) and UC-Berkley industrial relations expert Harley Shaiken have noted, tighter rules of origin could just mean a migration of production from Asia to Mexico, bypassing the U.S. entirely. For this reason, liberals have also called for an improvement in the labor rights terms of these deals.[4]

NAFTA advocates also have their own wish list. Bryan Riley of the Heritage Foundation, for instance, wants to get rid of the few labor and environmental obligations NAFTA does have, and also get rid of carve-outs countries made for sensitive sectors, such as oil. Simon Lester of the Cato Institute wants to make it easier for governments to challenge restrictions to trade. Chemical manufacturers want to eliminate lingering barriers to approval of their products.

So NAFTA could change, but there’s no guarantee it would go in the direction desired by the pact’s critics.

What are additional risks?

There is also the possibility that Trump may not find willing counterparties or have the negotiating chops to take a deal over the finish line. While NAFTA has waxed and waned in popularity in Mexico and Canada over the years, Trump’s threats to shred the deal have emboldened leaders in both countries. Mexican leaders say they are “in no rush” and don’t believe Trump has the support to follow through on his wildest threats. North of the border, opinion polls show Canadians are newly enthusiastic about NAFTA. Moreover, the Trudeau administration has crafted an international investment court proposal that it will likely push in any new deal. Team Trump, stocked full of conservatives distrustful of international legal bodies, seems unlikely to agree to such a proposal.

The “doomsday” scenario, then, is that Trump’s renegotiation attempts backfire, and the U.S. gets mired in tit-for-tat retaliation. The Peterson Institute’s higher estimates suggest a possible loss of 4.8 million jobs in a trade war with Mexico and China. But it’s important to put these numbers in perspective: They rely on very high tariffs (35-45 percent increases) and symmetric response from our trading partners. In more modest scenarios, national income and jobs deviate little from what they would otherwise be. Even in the full trade war scenario, the U.S. national income by 2024 is not very different from what it would be otherwise. Nonetheless, the potential for certain import-reliant and export-dependent sectors to experience losses should not be understated.

A related worry is that the deeply integrated nature of modern production puts even other jobs at risk. Many observers have pointed out that U.S. manufacturing is not wholly “Made in the USA,” but instead uses inputs from around the world. Our exporters thus need imports as inputs, and some of what other countries import from us are used as inputs. This is true, but analysis from the OECD and WTO helps put this into context. First, the U.S. is at the low end of supply chain dependence among major economies. While over 30 percent of Mexico’s exports come from imported inputs, the U.S. ratio is half that. Moreover, these percentages have not shifted dramatically since NAFTA and other trade deals came into effect, meaning other economic fundamentals and manufacturing considerations are likely of more importance for value added patterns. Certain industries have become more integrated. For instance, foreign value-added of U.S. motor vehicle exports jumped from 20 percent in 1995 to 35 percent today. On the other hand, similar numbers from the tech and electronics industry went in the other direction, from 20 to 10 percent. As the Obama administration’s commerce economist Susan Helper and I wrote,

U.S. supply chains still remain largely domestic. Eighty-five percent of U.S. exports are composed of U.S.-made parts; domestic content of overall U.S. production is similarly high. The threat to manufacturing jobs comes less from the globalization of supply chains than from the movement of large chunks of whole industries abroad.

In many cases, this process begins when manufacturers move labor-intensive components or assembly overseas. Before too long, they do the same for higher-tech operations as well. For example, U.S. personal computer manufacturers started by offshoring the assembly of printed circuit boards, then moved complete product assembly overseas, then supply-chain management, and, finally, design and innovation.

In any case, there are many factors reducing the real risk to our supply chains. In particular, corporations, foreign governments, elite economists, and opposing views within Trump’s own administration all have substantial power to keep the president from going too far.

Are there better ways?

Whether liberal or conservative, the problem with a NAFTA-specific approach is that there are thousands of trade and investment agreements around the world. If whatever upgrades are made do not automatically diffuse throughout the system, many changes can be “treaty shopped” around. For instance, NAFTA renegotiation could limit Canadian firms’ ability to use NAFTA to sue the U.S., but these same firms could launch lawsuits using other trade or investment agreements to which the U.S. is a party.

The Roosevelt Institute has outlined a new Sustainable Equitable Trade doctrine for upgrading trade policy that relies more on making unilateral and multilateral changes. For instance, rather than hope that any benefits of enhanced rules of origin or Buy America rules “trickle down” to workers, the SET Doctrine would directly target harmed workers with reparations and help get them on better footing by privileging firms that create good jobs. It would also overhaul our foreign policy and trade agenda to focus on fair taxation and fighting monopoly power. This is not only good policy, but likely to gain more political support than a tarnished legacy approach to trade policy.

Moreover, the SET agenda stands in contrast to the Trump administration’s desire to destroy the American administrative state. Even if Trump delivers on some of progressives’ wish list, it’s impossible for even the best trade agreements to deliver real positive change while shredding environmental protectionsgreenlighting mergers, and slashing taxes for the rich.

[1] Both have annexes that make them even longer.
[2] These include deals with Chile, Colombia, Korea, Morocco, Oman, Panama, Peru, and Singapore. Additionally, the U.S. has two regional deals with ISDS: NAFTA (with Canada and Mexico) and the Central America Free Trade Agreement (with Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua).
[3] The deals with Australia, Israel, Bahrain, and Jordan lack ISDS, although the latter two countries have separate bilateral investment treaties.
[4] Among the more ambitious proposals are to snap tariffs back to their pre-agreement levels if countries fail to uphold labor and environmental obligations—something that may be a hard sell to risk-averse negotiators.