Moreover, contrary to Professor Lustig's economic prognosis and, I may add, that of many other Mexican specialists, the country's mounting political problems have been further complicated by a grim economic outlook brought on by an unexpected and sharp recession. The country's real gross domestic product per capita last year fell by 1.
What is particularly worrisome is that this downturn in the economy has occurred at a time when the U. To make matters worse, the less than reassuring reaction of the administration of Carlos Salinas de Gortari to the growing political and economic uncertainty has adversely affected financial markets and led to a resurgence of capital flight, thus putting tremendous downward pressure on the value of the peso. Where does Professor Lustig's analysis and that of many other Mexican specialists go wrong? I think part of the answer can be found in the thoroughly conventional and reductionist approach employed by the author, Mexico: The Remaking of an Economy.
Author: Miguel D. Date: Oct. From: Southern Economic Journal Vol. FTA schedule. The schedules had year progressively eliminated tariffs with a handful of products reserved for 15 years. The purpose of rules of origin is to determine which products benefit from a trade agreement and which do not. Origin is always, to a greater or lesser degree, about shaping industrial outcomes. Consequently, these rules are central to every trade agreement and inherently political.
Consequently, they were often developed with specific political economy outcomes in mind. One example is the approach the U.
Mexico, the remaking of an economy
Destler recounts:. So the textile industry shifted its stance: if a growing share of clothing sold in the United States was to be imported, they would look for ways to have that imported clothing made with US cloth … They could live with NAFTA with the likely flood of apparel imports from lower-wage Mexico if North American clothing had to be made with North American cloth.
So the mills got their triple transformation test. In the vote extending fast-track rules that was a de facto authorization of the NAFTA negotiations, representatives from North Carolina had voted in the negative. But this was before the rules of origin Once the triple transformation test was embedded … and it came before the House for its dramatic final vote in , legislators from that state shifted to in favor.
Like most free trade agreements, countries included key exceptions to make the agreement politically viable. Chapter 11 was consistent with an evolving set of international norms about how investors should be treated and their rights in the event that governments expropriated or undermined their investments. Despite this, the chapter has become notorious for the uses, and some would argue, abuses of the investor state dispute settlement ISDS mechanism. The United States has been sued 20 times, has never lost and has never paid a penny. This means that everything is liberalized except what is deliberately excluded.
This stands in stark contrast to the Canada-U. A key advantage of the negative-list approach is that it defaults to liberalization as the economy changes. Canada and the United States were relatively modest in their financial services commitments. For example, Canada retained its long-standing policy that deposit-taking institutions Schedule A banks must be domiciled in Canada.
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Having negotiated NAFTA in the aftermath of the post financial sector restructuring, the government was keen to use NAFTA to both strengthen and internationalize the Mexican financial services providers. Under the agreement, Mexico agreed to a detailed path that would eventually allow U.
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The pace of liberalization was accelerated over the course of implementing the agreement. At the time of writing, five of the seven largest financial institutions are wholly or partially foreign-owned. Services often require people to deliver them. Business visitors, traders and investors, intra-company transferees and select professionals are permitted, with documentary and other caveats, entry into another NAFTA country for the purposes of delivering a broad array of commercial activities. Such entry is temporary and non-immigrant in nature. Chapter 16 is best known today for Appendix It catalyzed the cross-border integration of professions in North America as never before.
Congressional hostility toward temporary entry has made updating existing rules very difficult. There were three main dispute settlement provisions in NAFTA: the aforementioned investor-state regime in Chapter 11, the review of trade remedy actions in Chapter 19 and the resolution process of government-to-government disputes in Chapter Each of these dispute settlement processes contains detailed rules of procedure, clear processes for bringing a case and clear standards for how judgments are to be interpreted and applied.
There is even a review mechanism for the Chapter 19 panel process to ensure that the integrity of the process is safeguarded.
Chapter 19 permits a NAFTA party to request a final review of anti-dumping or countervailing duty determinations undertaken through the domestic trade remedy process of another party. Its origins can be found in the Canada-U. Free Trade Agreement, where it was literally the last issue to be settled. Canada, like many countries, resented what it regarded as the politicized and protectionist nature of the U. Securing this supranational review mechanism was a fundamental demand in that agreement.
Given that Mexico had also suffered from U. Recognizing the potentially political nature of trade remedies disputes, Chapter 19 includes the Extraordinary Challenge Procedure. If either party believes that the integrity of the panel process has been compromised, they can request the creation of a three-member Extraordinary Challenge Committee ECC. Given the seriousness of the matters under review, this committee is staffed by sitting and former judges. Over the last 20 years, there have been 69 Chapter 19 panels.
Each country has been an active user of the system. The record indicates a mix of results, with some domestic trade remedy decisions being upheld and some being remanded. During that time, three ECCs have been convened. Chapter 20 provides for the resolution of all government-to-government disputes regarding the interpretation and application of NAFTA. The basic procedure is as follows: the disputing parties first hold consultations.
If this does not resolve the issue, a five-member arbitral panel is convened. Chapter 20 panels do not offer binding decisions. Rather, they offer findings of fact. This includes determinations of inconsistency with NAFTA obligations and whether benefits of the agreement have been impaired.
The panels also offer recommendations on resolving the dispute at hand. To date, there have only been three such panels under the agreement. NAFTA was politically controversial when it was negotiated, especially in the United States, and it passed Congress by the narrowest of margins. The Canadian stock investment in the U.
Yet, people do not determine their support for a policy based on macro statistics. It is about how individuals and communities are faring. One of the great failings of the proponents of NAFTA after was that nobody took on the job of offering a counter-narrative, explaining the positive aspects of the agreement and how distinct phenomena affected the economy. What we've learned is we've got to continue to get out there and talk about this.
In addition, there was no meaningful trade adjustment assistance to help the losers from NAFTA, technology, China or much else. What assistance exists is notoriously hard to get, making it effectively meaningless in militating against both the down sides and negative perceptions about trade. Until the Trump election, proponents of open trade could rest comfortably in the notion that a path could always be found to advance further liberalization.
Shifting economic conditions have resulted in shifting politics. According to the U. Bureau of Labor Statistics, the U. The consequences for American politics have been profound. A groundbreaking study, Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure , found that areas hardest hit by trade shocks were much more likely to move to political extremes.
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It is imperative that we at least get the narrative piece right around the new NAFTA while concurrently developing an aggressive adjustment package to assist communities and workers who have been hard hit by economic change. This is hardly a distinctly American problem. Canada of late has been pushing the notion of a progressive trade agenda.
Unless this includes elements targeted specifically at helping those displaced in the new economic world, Canada itself risks seeing a diminishment of the relatively pro-trade sentiment that presently exists. What do they want out of a revised deal? What does this process mean for the conception and reality of North America in the years ahead? Because U. Others have expressed concerns about retrenchment in key areas. While the U. Importantly, nothing in the U. This comes as a great relief, especially to Mexico, which deeply feared a substantial U. Yet, they would be wise as the negotiations unfold to keep their eyes open for any deviation from this policy direction.
Since the Trump administration came to office, a cottage industry has emerged in speculating how the NAFTA process will unfold. In practical terms, it will look a lot like other trade negotiations. Negotiating sessions will be structured into rounds during which multiple tables will work simultaneously on an array of topics. Rather, there will be a single set of rules for everyone. In practical terms, this means a single agreement with a single set of rules of origin, common dispute settlement mechanisms and other key provisions.
While the negotiation will be trilateral, there will be plenty of specific provisions that are bilateral. After all, the original NAFTA contained significant areas of bilateralism, including three separate tariff schedules and three separate agreements that together comprise the agriculture chapter.
Potential bilateral topics include specific border management measures and temporary entry of business travellers. In terms of the calendar, the first round will take place in Washington, D.
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The planning going into the negotiations is to hold seven rounds at three-week intervals. While most negotiators will tell you that revealing objectives up front is unwise, the legislative framework under which the U. TPA requires the administration to notify Congress at least 90 days before initiating, of its intent to launch negotiations. At least 30 days prior to commencing, the administration must set forth detailed negotiating objectives that link back to the goals and targets set forth in the TPA legislation.
As a consequence, the United States has been very specific about its initial positions. For the most part, the list of U. In part, this is structural. After all, the TPA legislation sets forth its own detailed list of negotiating priorities that the executive branch is bound to follow. Yet, it also seems clear that the administration is moderating its views about the use of certain trade instruments to achieve policy goals.
While raising tariffs, for example, may reduce trade and the trade deficit with the partners on the receiving end, it would hurt the United States and create disruptions across the economy. Considering that 40 cents of every dollar that Mexico exports to the United States and 25 cents that Canada exports is U. While raising tariffs or introducing quotas does not seem to be in the cards, tightening rules of origin to create an incentive for more production in North America is central.
Engineering policy outcomes are very much doable, but will require incredibly specific sectoral knowledge. Tighter rules of origin in North America may come at the expense of production in Asia. More production in North America potentially means some measure of increase in manufacturing jobs, meaning that Canada and Mexico should be agreeable. On agricultural goods, the U. Fundamentally changing the Canadian supply management regime would be a more politically fraught and certainly a long process.
At the recent U. A newer area on the U. Regulatory Co-operation Council and to catalyze an even more ambitious level of collaboration between the two countries in this field.
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Financial services are on the U. While not explicitly clear, the intent seems to be to try to give U. This would pose huge difficulties from a political and regulatory perspective for Canada. Digital trade and cross-border data flows are an import from the TPP. While some Canadian jurisdictions have limited restrictions on data flows out of their provinces, the U. This suggests a U. These are less aimed at the countries of North America than at setting an international precedent for dealing with these themes.
There are not huge numbers of state-owned enterprises in North America engaged in international trade. The risk of including these non-core themes in the new NAFTA is that poor drafting could lead to unintended consequences. If the countries feel that it is important to include these themes, one must clearly delineate the parameters of what is covered and what is not covered. Labour and environment are key themes. The tenor of the U. Mexico is expected to resist such a push, fearing that it will erode its competitiveness.
Given how hard Canada fought to get this process included in the Canada-U. FTA, they will not give it up easily. A core belief of Canadian trade policy is that trade agreements must include mechanisms to allow the smaller country to be put on a level playing field with the larger country and to have disputes resolved on the basis of fact, not power. Given its use over the years in cases involving such products as softwood lumber, Chapter 19 has taken on an emotional quality in Canada.
This complicates the pathway to a resolution on this point. The government procurement section makes explicit the U. The language on energy in the U. Yet, they also know how sensitive this issue is in Mexico. The rather general statement by the U. Canada and Mexico will, of course, bring their own demands to the table.
Tactically, both governments have decided to wait to see the U. Other logistics measures, including empty trailer repositioning for trucks and a phasing out of the Jones Act for shipping may be on the agenda. Mexico is expected to join Canada in opposing changes to Chapter It also will seek a greater harmonization of labour markets and agricultural safety standards as well as the adoption of a robust set of rules governing the digital economy. The Jones Act and labour market integration seem out of reach for the two countries.
Movement on Chapter 16 and agriculture seems possible.