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NAFTA and the Future of Trade Governance

March 13, 2006 // 8:00am11:00am
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Mexico Institute
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NAFTA AND THE FUTURE OF TRADE GOVERNANCE (program)

NAFTA: A Sustainable Institution?
Louis Bélanger, Institut québécois des hautes études internationales, Université Laval, Canada-U.S. Fulbright Visiting Scholar, School of Advanced International Studies, Johns Hopkins University, and former Public Policy Scholar, Wilson Center (Fall 2005)

NAFTA and the Modern Tools of Global Trade Governance
Chair: Isabel Studer, Research Director, Commission for Labor Cooperation and Affiliate Professor, Centro de Investigación y Docencia Económica (CIDE)

"Innovations and Innovating Processes in Trade Governance"
Mark D. Nguyen, Senior Policy Advisor, International Trade, Bryan Cave LLP

Decision-making and Negotiations: Comparisons with WTO
Robert Wolfe, Associate Professor and MPA Program Director, School of Policy Studies, Queen's University

The United States and the Institutionalization of Trade Governance
Sidney Weintraub, William E. Simon Chair in Political Economy, Center for Strategic and International Studies

NAFTA and the Future of Trade Liberalization
Chair: Carol Wise, University of Southern California; Public Policy Scholar, Wilson Center (Spring 2006)

NAFTA's Dispute Settlement System: Under Stress?
Gustavo Vega-Canovas, Professor and Director of the Center for International Studies, El Colegio de México

A Common External Tariff without a Customs Union?
Donald R. Mackay, Director, Washington Office, The Centre for Trade Policy and Law, Carleton University

Adjusting NAFTA to the Post-NAFTA Web of Free Trade Agreements?
Maryse Robert, Acting Chief, Trade Section, Organization of American States

NAFTA in the Context of Modern Trade Governance: A Sustainable Institution?
When Canada, Mexico, and the United States negotiated the North American Free Trade Agreement (NAFTA) a little more than a decade ago, it was greeted as the most ambitious and comprehensive trade deal ever to have been signed. This was a period of innovation in trade governance and "NAFTA was at the vanguard," as Louis Bélanger put it. 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) as well as 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 at the conclusion of the ongoing Doha round of negotiations.

Trade governance has thus evolved significantly since the ratification of NAFTA, but the agreement itself has been left essentially untouched. NAFTA's rigidity is largely a result of its design: the negotiators eschewed any mechanisms within the treaty to consider changes or opportunities for reconsidering certain clauses. Bélanger said that they "failed to endow the NAFTA with even minimal political life of its own." Indeed, he argued that the treaty excludes any form of political delegation to change the agreement, whether "constitutional delegation" (i.e., built-in mechanisms for review), or "political and administrative delegation" for the day-to-day implementation, enforcement, and managing of the treaty (i.e., political institutions to "fill the gaps" of the treaty with secondary rules and regulations as necessary).

As a result, there is a limit on the scope and depth of the NAFTA; more importantly, the NAFTA may not be sustainable in the long run, its relevance slowly "eroding." The immediate consequence of this "delegation deficit," however, has been the growing pressure on the existing dispute settlement mechanism. Gustavo Vega argued that the treaty's mechanisms for resolving trade disputes had worked reasonably well in the beginning and throughout the 1990s. 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. Bélanger remarked that many in the United States have come to see the treaty dispute settlement mechanism as a "political and administrative body," as opposed to a strictly judicial one (the U.S. lumber industry, for instance, filed a constitutional challenge to NAFTA's Chapter 19 on these grounds). He therefore argued for the importance of having a dispute settlement mechanism that was "exclusively judicial, not political."

Another consequence of the treaty's "delegation deficit" is the growing animosity toward NAFTA in all three countries—albeit for different reasons. Vega explained that in Mexico the NAFTA is widely perceived to have "failed to tackle immigration," a key policy issue for successive Mexican governments (and the foremost foreign policy issues for two of the three candidates in the upcoming 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: no such revisions are possible without wholesale renegotiation from scratch or without political support in all three countries, which is currently lacking. Furthermore, Sidney Weintraub cautioned against presuming that any reconsideration of the NAFTA or certain parts of the treaty would necessarily lead to improvements: "do not underestimate protectionist tendencies in the United States." Recent calls by leading Mexican politicians of all hues to revisit the agricultural chapter of the NAFTA may prove appealing campaign rhetoric, but pointlessly risk raising expectations.

Recent Trends in Global Trade Policymaking
Increasingly, trade policymakers are looking to the WTO and the Doha round of negotiations for innovations in trade governance. Mark Nguyen provided a concise overview of the trade governance under the WTO, explaining the mechanisms and institutions governing the negotiations, implementation, and enforcement of trade rules. Contrary to the NAFTA, the WTO has a robust "gap-filling" mechanism, which ensures an evolving set of rules and regulations that can be modified as needed. Nguyen noted, for instance, that rules governing intellectual property rights were amended for the least developed countries by way of a WTO ministerial. Since regulations are binding, member states tend to be extremely active, making the organization "very dynamic, but unwieldy." A proposal for a Senior Officials Consultative Body gained little traction. The decision-making process based on unanimous consensus is arguably the WTO's Achilles heel, while compliance is one of the strongest aspects of WTO institutions.

Taken together, Nguyen argued that the outlook for the WTO's long-term sustainability was promising, despite the risk of the Doha round producing a lackluster agreement. Likewise, he argued that the more recent FTAs signed by the United States appear more viable than NAFTA in the long run. These recent FTAs contain annual and sectoral "review commissions," thus endowing these treaties with mechanisms of political and administrative delegation absent in NAFTA. Likewise, the Central American Free Trade Agreement (CAFTA) included mechanisms for trade capacity building as an integral part of the treaty, another novelty eschewed by NAFTA negotiators.

The discussion highlighted the growing trend in trade negotiations toward either bilateral or multilateral deals at the expense of regional agreements such as the NAFTA. Wolfe and others argued that once trade issues are dealt with multilaterally, there often remains insufficient "critical mass" to support further negotiations at a regional level. Furthermore, if specific issues cannot be resolved multilaterally or regionally (such as, for instance, agricultural subsidies), there may not be enough issues remaining to structure an efficient give-and-take for striking a future agreement. Where such trade-offs 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 have also aggressively pursued bilateral FTAs. Maryse Robert explained that the resulting web of bilateral trade agreements have essentially undermined the prospects for a hemisphere-wide FTAA.

Nguyen argued that this growing web of FTAs is becoming a critical factor for companies with global supply chains, who must take such preferential trade agreements into account for their business planning. Perhaps paradoxically, the multiplication of bilateral and regional FTAs has also created disincentives for investment because of disparate rules and regulations. The auto industry, for instance, faces a host of different regimes depending on the FTAs covering trade among and between given countries in the hemisphere. Yet prospects for "stitching together" these disparate FTAs are dim. The United States conceivably could consolidate its various regional agreements into a single framework since each U.S. FTA follows a similar "template," but other countries may be reluctant to follow suit, since it would likely imply following the U.S. FTA model.

Moving Forward: the Future of Trade Governance in North America
As one participant noted, from the business community's perspective, North American integration is already apace—regardless of the prospects for adapting or modifying the NAFTA. In both Canada and Mexico, the private sector is keenest on regulatory cooperation, improving the dispute settlement mechanism, and ensuring seamless trade across the border. Vega suggested a system similar to that of the WTO for convening dispute settlement panels, whereby panelists are automatically appointed from an established roster. Canadian businesses also strongly favor "trimming or eliminating" the rules of origin and addressing obstacles to competitiveness. Bélanger emphasized, however, that none of these initiatives can prosper without political will: "You cannot liberalize without political delegation."

How can NAFTA be made more easily adaptable to new trade issues and environment? One way is to consider changes limited to specific sectors. Mackay and Weintraub each argued that deep-seated political obstacles would prevent NAFTA from evolving into a full-fledged customs union. Yet the benefits of a customs union can possibly be achieved through "bilateral or unilateral initiatives." Mackay argued that the most promising sector that could reap the benefits of such harmonized tariffs would be the auto sector, but panelists agreed that the onus would be on Mexico and Canada to move unilaterally in this direction. That said, Isabel Studer pointed out that the benefits to the North American auto industry would be limited because of a host of additional non-tariff barriers and regulatory impediments. Mackay concurred; such a move would only address one of the constraints preventing a truly integrated North American auto industry.

Another way of addressing this question is to reformulate it: Robert Wolfe argued that the key to moving trade governance forward is to ensure that non-codified decision-making processes work effectively. In other words, given NAFTA's rigidity, bureaucracy-to-bureaucracy talks and "backroom deals" become the preferred channels of communication and decision making. The challenge, then, is to reassure the public and the body politic that such "corridor talks are working." During the question and answer period, the discussion turned to the Security and Prosperity Partnership (SPP), and whether this trilateral, government-to-government initiative, devoid as it is of significant political capital and congressional input, could facilitate substantive improvement to trade governance. According to Bélanger, the SPP may appear ambitious, but it falls short of proposing any modifications to NAFTA. All agreed that despite the upcoming leaders' summit in Cancún on March 30, 2006, there is little political will to consider any substantive changes to existing trade governance rules within the NAFTA region.

Mackay argued that it will depend on the extent of any political realignment in the U.S. Congress following the November 2006 mid-term elections as well as the outcome of the 2008 presidential elections in the United States. For the time being, however, President Bush is unlikely to expend his dwindling political capital on anything controversial beyond what his administration has already set out to do under the SPP. Likewise, Mexico's Vicente Fox is a much diminished political figure, and the new Mexican president will not take office until December 2006. If Stephen Harper secures his party's position in power by then, especially if his Conservative party were to win a majority, the Canadian government would be in a much stronger position to tackle such delicate NAFTA questions.

David N. Biette, Director, Canada Institute, (202) 691-4133
Andrew Selee, Director, Mexico Institute, (202) 691-4088

Drafted by Christophe Leroy

 

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