When the North American Free Trade Agreement (NAFTA) was negotiated in the early 1990s, its founders took care to insert an exit clause — as Article 2205. It stipulates that a party might withdraw with six months’ notice and that the agreement would remain in force between the other two. This language is no accident. Negotiators never thought the U.S. would be the country threatening to leave. It was easier to envision Mexico tiring of strong competition from U.S. and Canadian firms and having a populist future president begging for a break. The agreement would remain in place between the two developed, dynamic and highly competitive economies of the U.S. and Canada.
But then, NAFTA’s story has been full of surprises — many of them positive, despite the current prevailing narrative.
Back in the early 1990s, Mexico, Canada and the United States shared the same objective: eliminate investment and trade barriers in the region, which could serve as an example for other countries to follow. Measured by this standard, NAFTA’s success is undeniable. Now, the White House has set forth a new negotiation objective: mend the “catastrophe” NAFTA has supposedly represented for the U.S.
The result of that negotiation seems highly uncertain, given the foreseen difficulties regarding both process and content.
But it’s important to recall why NAFTA represented a milestone in international trade negotiations. The treaty pioneered the development of trade disciplines such as rules of origin, intellectual property, dispute settlement mechanisms, rules on labor and environmental protection, and opening of cross-border investment and services based on negative lists (all remaining goods and services were automatically opened). It paved the way for the conclusion of the Uruguay Round, the approval by the U.S. of the Marrakesh Treaty, and the creation of the World Trade Organization. It also gave fresh impetus to the Asia Pacific Economic Cooperation Agreement, stimulated regional and bilateral agreements in Latin America, and led Colombia, Chile and Peru to imitate and even improve upon the trade agenda set forth by Mexico. Last but not least, it allowed the three North American partners to negotiate and establish trade treaties with countries that sought similar conditions, although none were as ambitious or as profound as NAFTA.
All of the above are reason enough to celebrate the success of NAFTA, but its historic value goes well beyond that. The treaty represented the first agreement linking two developed economies with a third that was relatively closed and poor. At the outset of negotiations, many suggested that NAFTA should embrace the tradition of granting the least-developed country special and differentiated treatment, i.e., refrain from imposing the same set of obligations on it as on the developed countries.
But two revolutionary and unique characteristics of NAFTA departed from that conventional wisdom: symmetry and universal coverage. Rights and obligations were to be the same for all three partners, and applied equally to all investment sectors, goods and services. The few areas reserved for special treatment, listed on annexes, would gradually be incorporated into the agreement as each country opened up through legislation unilaterally. This is called the “ratchet clause” in trade parlance.
Symmetry was and remains NAFTA’s most important value for Mexico, for two reasons. First, it was and remains unacceptable for Mexico to be treated as a minor partner — one that requires patronizing conditions. In effect, NAFTA marked Mexico’s coming-of-age in the international arena. Second, NAFTA disciplines and the rule of law they imply represented an historic, revolutionary opportunity for Mexico to establish them in at least a growing segment of its economy. The country committed itself to abide by a body of international obligations that its Supreme Court has ruled as out-ranking federal law. Also, NAFTA not only opened Mexico to international competition but helped create a competitive market at home, thanks to the treaty-mandated establishment of a National Antitrust Commission — an institution without precedent in Mexico in 1994.
It’s worth asking why the Mexican private sector embraced NAFTA. For many, the treaty meant the end of arrangements to allocate prerogatives and market share to friends and political allies. The answer lies in the superior value of property rights and the prevalence of rule of law that allowed for a much larger market. In other words, even if market share for Mexican entrepreneurs became smaller with NAFTA than in a relatively closed economy, the value of their share might become much larger — although uncertain, thanks to competition.
In 2017, the treaty is no longer a preferential agreement for Mexican exports to the U.S. The Most Favored Nation import duties on Mexican exports that would be levied by the U.S. without NAFTA are close to 2 percent for industrial goods and 6 percent for agricultural goods (approximately). Thus, the real impact of any NAFTA renegotiation on Mexico may not be an increase in duties for its exports but the effect it may have on the country’s ability to remain open to trade and investment.
Mexico must therefore not accept a renegotiation that moves again from symmetry, undermines the opening to trade, or imperils the movement toward a more competitive North America. Moreover, any renegotiation that promotes managed trade, or leads to a return of favoritism and “under the table” arrangements to protect a given sector from the rigors of open competition — thus damaging consumers’ and citizens’ rights, as well as hindering economic growth — ought to be unacceptable. Nevertheless, Mexico can and should entertain a revision of NAFTA that aims to make North America more competitive and open to the world.
Moreover, while Mexico must not contemplate leaving NAFTA, it must be willing to quit the negotiation table if faced with unacceptable proposals from the U.S., notwithstanding Donald Trump’s threat to unilaterally leave the treaty. If Trump fulfilled his threat — provided Congress allows it — Article 2205 of NAFTA, as mentioned earlier, makes clear the treaty would remain in force between Canada and Mexico. This is strategically important, since all of NAFTA’s disciplines would remain in force and would guarantee the rule of law in Mexico.
Regardless of the outcome with the U.S., Mexico’s most important priority now should be to open its economy even more to the whole world, while at the same time ensuring that the rights of consumers, producers and investors are respected and enforced as an indispensable element of competitiveness.
For the U.S., symmetry was the key to “exporting” its legal system to ensure a level playing field for its transnational companies. Likewise, many U.S. analysts viewed NAFTA as a mechanism for locking in Mexico’s reforms and trade opening.
Now, some of President Trump’s advisors seem to dislike those high disciplines when applied to the U.S. In a way, they appear to be asking to be treated as a developing country, deserving special and differential treatment, rather than high level and symmetric disciplines. This is consistent with Trump’s rhetoric, which claims that U.S. companies cannot compete with Mexican ones under the present rules. Mexico did not request such exceptions in the early 1990s. It’s somehow flattering that the U.S., the world’s most powerful economy, requests a lesser level of discipline than Mexico ever felt the need for.
President Trump and his negotiators should keep in mind that, for the U.S., NAFTA is indeed a preferential agreement. Mexico’s Most Favored Nation duties in the World Trade Organization, especially in agricultural goods, are relatively high. By exiting NAFTA, the U.S. would lose privileged access to its second largest market. That would, by implication, advantage European, Latin American and Japanese companies, which currently enjoy free trade agreements with Mexico. Furthermore, investors from the U.S. would lose access to international arbitrage, but they would also lose the benefits of the recent Mexican reforms, which they now enjoy thanks to NAFTA’s previously mentioned ratchet clause.
NAFTA’s principle of symmetry helped foster the opening of the Mexican economy. Now, we are about to test whether the same principle is robust enough to prevent the U.S. from becoming protectionist.
For Mexico, the antidote to Donald Trump is to guarantee its citizens, investors and international markets that the country will not return to protectionism and, in fact, to accelerate the movement toward a further opening of its economy. The best way to do so is to efficiently implement the recent structural reforms, push for expanded trade access in any NAFTA renegotiation agenda, broaden the membership of the Pacific Alliance, and enhance the trade negotiations with Europe (which have already begun), Australia, New Zealand and, potentially, Brazil and Argentina. The only way Mexico can get along with Donald Trump is not to depend on him for it to become a competitive country.