On May 18, new United States Trade Representative (USTR) Robert Lighthizer announced the Administration's intent to renegotiate the North American Free Trade Agreement (NAFTA), signaling the start of the required 90-day period of formal consultations with Congress before negotiations can begin, in accordance with the Bipartisan Congressional Trade Priorities and Accountability Act of 2015. One of the main emphases of the U.S. Administration in the negotiations will be updating NAFTA, which entered into force in 1994, in several areas where technology and policy have evolved considerably in the last 23 years. The governments of Canada and Mexico have agreed on the need to modernize NAFTA and incorporate new disciplines or modify existing ones in order to strengthen the integration of industries across the region. These include digital economy, customs rules and procedures, and regulatory practices. This is the first time that a U.S. administration has re-opened a bilateral or regional free trade agreement in the GATT/WTO era, and it creates a tremendous opportunity to modernize and develop new North American approaches in areas important to our collective economies. The renegotiation, particularly in new areas, will be closely watched by the international community, and will undoubtedly influence regulatory and policy approaches globally.
Why NAFTA 2.0 Could Be So Consequential
There are more than 480 million consumers in North America (compare that to the 435 million people in a European Union without the UK), a number that is still increasing. Canada, Mexico, and the United States also have the largest integrated economy in the world, with shared supply chains and similar consumer preferences. Given the size and integration of the North American market and the large volume of trade within the continent and with other nations, any approaches that apply to a combined North American market would be more likely to be used as a starting point for regulators, customs authorities, and policymakers in other countries. In this connection, Mexico has become an increasingly important reference for regulatory coherence, cooperation, and alignment: its network of twelve Free Trade Agreements (plus others in the pipeline) are allowing it to "export" North American approaches to other trading partners. And any new disciplines in a revised NAFTA on how to regulate (or how not to regulate) that are not currently reflected in U.S. law would need to be put into a NAFTA implementation bill, which would enable those disciplines to be enforced in U.S. courts.
Given similarities in desired regulatory outcomes, contiguous modes of transportation, integrated supply chains, and the long-standing familiarity and working relationship between governments and business over the last 23 years of NAFTA, Canada, Mexico, and the United States should pursue more ambitious disciplines than were possible in the Trans-Pacific Partnership (TPP) negotiations. Our negotiators should think more broadly than the region and craft an agreement that addresses trade and investment issues faced by our exporters in North America, and considers issues that our companies have faced in the markets of other major trading partners, such as Argentina, Brazil, China, the European Union, India, Indonesia, Korea, Japan, the Russian Federation, Saudi Arabia, South Africa, and Turkey.
There are at least three key areas where an opportunity exists to reshape the global regulatory and policy environment through a NAFTA modernization.
One of the key areas set out in the Lighthizer letter to Congress is regulatory practices. Based on recent experience in TPP and T-TIP, this term could encompass regulatory coherence (good regulatory practices), regulatory cooperation, and regulatory alignment in specific sectors. Existing trade agreements, such as NAFTA, principally address the need for countries to eliminate regulatory measures that violate trade rules: for example, measures that discriminate against imported products but are not based on relevant international standards, or are otherwise unjustified. But in 2017, North American companies are not interested in a deal that addresses only those rules that violate trade agreements. They want an agreement that gets our respective regulators to work together, resulting in the reduction of inconsistent, duplicative, and unnecessary requirements. The costs of undergoing multiple tests, product reviews and approvals, and inspections and verifications that have already occurred in another country and are not recognized by regulators in other jurisdictions are considerable and are being incurred by consumers, business, and governments. The mere fact that countries' regulations are different, and require multiple applications of similar administrative requirements, also negatively impacts regional and global supply chains and stymies trade, particularly for small and medium-sized enterprises. NAFTA modernization provides an opportunity to secure more regulatory cooperation, which will lead to the development of common approaches and compliance programs and closer alignment of the technical requirements.
To better align how we regulate while not reducing levels of protection would require new levels of cooperation between regulatory agencies that encompass the entire life cycle of rulemaking: from joint information-gathering and research to joint regulatory planning, from developing joint regulatory proposals to establishing joint stakeholder advisory committees, from coordinating on regulatory roll-out so that the same rules apply throughout the North American market at the same time to collaborating on retrospective review. Furthermore, once a regulation is established, cooperation in its implementation and enforcement should be better aligned and redundant activities eliminated. Such efforts could be complemented by crafting new sectoral disciplines in emerging technology areas; and by developing a North American strategy for using international standards, guidelines, or recommendations, and conformity assessment or control, inspection, or approval procedures as tools for alignment of regulatory approaches that unleash economic growth and innovation and provide the highest levels of health, safety, and environmental protection. The U.S. and Mexican administrations' new push on regulatory reform should also help, since regulators will be looking for regulatory cost savings, and increasing alignment can reduce compliance costs.
Emerging technology issues
The Internet was in its infancy in 1994. Issues such as promoting the free flow of data, a global Internet, lawful access to information online, and freedom of expression; ensuring adequate data protection; and supporting a multi-stakeholder approach to Internet governance emerged much later and are not covered by NAFTA. There is no e-commerce chapter in NAFTA, for instance, and there are no specific provisions on emerging technology issues.
The NAFTA Parties could negotiate a new NAFTA Chapter on Digital Trade, using the Trans-Pacific Partnership e-commerce chapter as a starting point. Such provisions, which would be used in subsequent free trade agreements involving the NAFTA Parties, would provide an important counterweight to countries that are imposing unjustified restrictions on data flows; requiring that data storage be localized or that source code or other intellectual property be shared with local partners as a condition of doing business; restricting access to online content, which is creating a balkanized Internet; and undermining the private sector's role in developing and maintaining a free and open Internet. New disciplines could include a chapter on cybersecurity that trilateralizes a private sector-led, standards-based, risk-based, non-regulatory approach to cybersecurity and resiliency; and provisions on other digital economy issues, such as enhancing the digital skills of the North American workforce, providing sufficient digital infrastructure to support deployment of 5G, the Internet of Things, and Smart Cities, and promoting a healthy business environment for development of autonomous vehicle technology throughout North America and globally.
Customs and trade facilitation
When NAFTA entered into force in 1994, customs forms were paper-based. It would be more than two decades before the advent of the WTO Trade Facilitation Agreement (TFA), and before Canada, Mexico, and the United States put in place their respective electronic import-export "single windows."
The NAFTA countries could negotiate a new NAFTA Chapter on Customs Administration and Trade Facilitation, drawing from the TFA and Trans-Pacific Partnership texts. The chapter could require that, by 2020, the three countries would (1) align the format and content of data elements required at the border; (2) develop a North American Single Window; and (3) create a unified North American trusted trader program that would ensure fewer goods are stopped at the border, while our respective customs authorities are able to catch more non-compliant products through the use of analytics to improve their risk-targeting strategies. In addition, the chapter would build on the supply chain disciplines set out in the TPP Chapter on Competitiveness and Business Facilitation. The ability to move cargo from point A to point B in an efficient manner is as critical to trade facilitation as customs administration. Our governments should seek to incentivize investment in physical and digital infrastructure in the port and supply chain space and adoption of best practices to optimize port and supply chain operations. Implementing these commitments would improve the competitiveness of North American supply chains and our manufacturing base and speed the shipment of NAFTA originating goods to foreign markets.
The USTR's notice in the Federal Register requesting public input to inform the development of U.S. positions and objectives when negotiating the modernization of NAFTA with Canada and Mexico stands as the first opportunity for input from across the region to set the negotiating agenda. While the three governments will be developing their negotiating positions over the summer, this notice can serve to bring industry stakeholders throughout North America together to shape positions, flag issues of priority and concern, and raise new possibilities, such as those summarized above, for inclusion in a revised NAFTA. Experience dictates that building private sector support in all three countries for a particular priority will best position an issue for success in the negotiations. Given the potential for bilateral trade irritants to complicate the talks, the presence of trilateral coalitions pushing proposals to enhance North American competitiveness will be seen as welcome counterweights. The stakes in these negotiations could not be higher, but so are the possibilities to work together to create an innovative, twenty-first century NAFTA.