NAFTA: Is It Sustainable?

Lead story from May 2006 Centerpoint

May 03, 2006

When Canada, Mexico, and the United States negotiated the North American Free Trade Agreement (NAFTA) 12 years ago, it was greeted as the most ambitious and comprehensive trade deal ever signed, an innovative feat in trade governance.

Since then, negotiations surrounding new free trade agreements (FTAs) have become more complex and, at times, more controversial. The mid-1990s saw the creation of the World Trade Organization (WTO) and the launch of negotiations for a Free Trade Area of the Americas (FTAA). Multilaterally, new rules and institutions have inaugurated an era of unprecedented economic openness, with the prospect of further trade liberalization following the Doha round of negotiations.

Trade governance has thus evolved significantly since NAFTA was ratified, but the agreement itself essentially has been left untouched. The Wilson Center's Canada Institute and Mexico Institute held a conference on March 13 to discuss NAFTA's utility given the new trends emerging in global trade governance.

NAFTA's rigidity results from its design, argued Louis Bélanger, a Canada-U.S. Fulbright visiting scholar at Johns Hopkins University-SAIS and a recent Wilson Center public policy scholar. He said negotiators avoided mechanisms that would have given the treaty flexibility. "[They] failed to endow the NAFTA with even minimal political life of its own," he said. Indeed, he argued, the treaty excludes any form of political delegation to change the agreement, constitutional or administrative, for day-to-day implementation, enforcement, and management. There are, therefore, no political institutions to "fill the gaps" of the treaty with secondary rules and regulations as necessary, said Robert Wolfe, an associate professor at Queen's University's School of Policy Studies.

As a result, panelists concurred, the NAFTA's scope and depth is limited, and it may no longer be relevant or sustainable in the long run. The immediate consequence of this "delegation deficit," however, has been the growing pressure on the existing mechanisms to settle trade disputes. Gustavo Vega, director of the Center for International Studies at El Colegio de México, argued these mechanisms had worked reasonably well in the beginning and throughout the 1990s. For example, Mexico-U.S. disputes over avocados and tomatoes were resolved at the consultation stage; the Canada-U.S. dispute over uranium exports was similarly diffused without having to convene a panel.

The Mexico-U.S. sugar case of the late 1990s, however, proved a turning point: the United States initially refused to appoint panelists, thus stalling the conflict resolution process. Meanwhile, the Canada-U.S. softwood lumber dispute has dragged on interminably, undermining the credibility and legitimacy of the mechanisms at hand.

NAFTA's "delegation deficit" also has caused growing animosity toward the treaty in all three countries, albeit for different reasons. Vega said Mexican officials widely perceive it to have "failed to tackle immigration," a key policy issue for successive Mexican governments, and a central foreign policy issue for two of the three candidates in the July 2006 presidential elections. Yet talk of "NAFTA Plus" or reopening certain chapters of the treaty to address these types of complex policy questions misses the point, said Vega, as no such revisions are possible without renegotiation from scratch or without political support in all three countries.

Furthermore, Sidney Weintraub, the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies, cautioned against presuming that reconsidering all or part of the NAFTA would necessarily lead to improvements. "Do not underestimate protectionist tendencies in the United States," he said. Recent calls by leading Mexican politicians of all hues to revisit the agricultural chapter of the NAFTA may prove appealing campaign rhetoric, he said, but pointlessly risk raising expectations.

Recent Trends
Increasingly, trade policymakers are looking to the WTO and the Doha round of negotiations for innovations in trade governance. Mark Nguyen, a senior policy adviser in international trade at Bryan Cave LLP, said that, contrary to the NAFTA, the World Trade Organization has a robust "gap-filling" mechanism to ensure an evolving set of rules and regulations that can be modified as needed. Nguyen noted, for instance, the WTO amended the rules governing intellectual property rights for the least developed countries.

Since regulations are binding, member states tend to be active, making the organization "very dynamic, but unwieldy," he said. The decision-making process based on unanimous consensus is arguably the WTO's weakness—a recent proposal for a Senior Officials Consultative Body gained little traction—while compliance is one of the strongest aspects of WTO institutions.
Taken together, Nguyen argued, the WTO's long-term sustainability is promising, despite the risk of the Doha round producing a lackluster agreement. Likewise, he said the more recent FTAs signed by the United States appear more viable than NAFTA in the long run. These recent FTAs contain annual "review commissions" divided by sector thus offering mechanisms of political and administrative delegation absent in NAFTA. Likewise, the Central American Free Trade Agreement (CAFTA) built in mechanisms for trade capacity building, another novelty overlooked by NAFTA negotiators.

Panelists noted a growing trend in trade negotiations toward bilateral and multilateral deals at the expense of regional agreements such as NAFTA. Wolfe and others argued that once trade issues are negotiated multilaterally, there often remains insufficient "critical mass" to support further negotiations at a regional level. Where such tradeoffs can occur, countries tend to opt for select bilateral deals. The United States, for instance, has adopted a dual strategy of pursuing bilateral FTAs alongside its multilateral diplomacy at the Doha round. Mexico, Chile, and others in the hemisphere also have aggressively pursued bilateral FTAs. Maryse Robert, acting chief in the trade section of the Organization of American States, said the resulting web of bilateral trade agreements has undermined the prospects for a hemisphere-wide FTAA.

Moving Forward
From the business community's perspective, North American integration is already apace. In Canada and Mexico, the private sector is eager to improve regulatory cooperation and the dispute settlement mechanism, and guarantee seamless trade across each border. Vega suggested a WTO model for convening dispute settlement panels, whereby panelists are automatically appointed from an established roster. Canadian businesses also advocate addressing obstacles to competitiveness. Bélanger emphasized, however, that these initiatives require political will.

To adapt to new trade issues, panelists suggested considering changes limited to specific sectors. Donald Mackay, director of the Washington office of Carleton University's Centre for Trade Policy and Law, suggested the auto sector could reap the benefits of harmonized tariffs, but Isabel Studer, research director at the Commission for Labor Cooperation, said the benefits to the North American auto industry would be limited due to other non-tariff barriers and regulatory impediments. Mackay concurred such a move only would address one of the constraints preventing a truly integrated North American auto industry.

Wolfe argued that ensuring non-codified decision-making processes work effectively would help advance trade governance. Given NAFTA's rigidity, bureaucracy-to-bureaucracy talks and "backroom deals" become the preferred channels of communication and decision-making.

For now, little political will exists to consider any substantive changes to trade governance rules within the NAFTA region. Mackay argued that political alignments in the United States following the November 2006 midterm elections could change that scenario. For now, however, speakers agreed, President Bush is unlikely to expend his dwindling political capital on anything controversial beyond what his administration has already committed. In Mexico, NAFTA could be on the agenda once a new president takes office in December. By then, in Canada, Stephen Harper will be vying to secure his party's position in power. If his Conservative Party wins a majority at the next election, which many expect could be held in the next 18 months, the Canadian government would be in a much stronger position to tackle the delicate questions surrounding NAFTA.



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