To access the full paper, download the PDF on the left-hand sidebar.

I. Introduction

One of the major challenges facing the three NAFTA parties as they continue a long, difficult, and very possibly unsuccessful process of updating and modifying NAFTA will be what changes to make with regard to the major cross-border institutions. Because NAFTA is a trilateral agreement, these challenges necessarily face all three NAFTA parties if they all remain parties. The only uniquely U.S.-Mexico cross-border institutions of this nature are the North American Development Bank (NADBank) and the Border Environment Coordination Commission (BECC), both of which are discussed in a separate paper. In contrast, the three major NAFTA institutions discussed in this paper deal with two borders—those between the United States and Mexico and the United States and Canada—not just the southern border.

The term “institution” is a mixed one in NAFTA parlance because of the aversion of the United States against creating new institutions. Thus, there is an ad hoc nature to most of the NAFTA institutions with, for example, the absence of anything that could be characterized as a NAFTA “court.” While U.S., Mexican, and Canadian sections of the NAFTA Secretariat exist, they are effectively small offices in the respective departments of commerce or foreign trade. The only quasi-independent institutions originating as part of the NAFTA package are the Commission on Environmental Cooperation (CEC) and its secretariat, created under the North American Agreement on Environmental Quality (NAAEC).

This discussion focuses on dispute settlement institutions but also discusses border impacts. Part II addresses the NAFTA mechanisms for dispute settlement in investment, unfair trade, and state-to-state controversies over application and interpretation of NAFTA (Chapters 11, 19, and 20, respectively), along with the NAFTA Secretariat (which manages Chapter 19 and 20 disputes). Sections A-D each discuss the formation and operations of each of the institutions, including the NAFTA Secretariat. In each, possible changes (including the elimination) that might take place in a NAFTA renegotiation are reviewed. The focus is on the changes proposed by the Trump administration or stakeholder groups, or by Canada and Mexico. NAFTA is not likely to be denounced by the Trump administration based on the results of discussions of the dispute settlement mechanisms per se, but the perceived success or lack of success by the U.S. government in seeking changes to, or the elimination of, dispute settlement will undoubtedly influence the administration’s decision to preserve or terminate NAFTA. Part III of the paper discusses the impact of the dissolution of NAFTA on trade aspects of cross-border economic relations, and comments briefly on the cross-border groups that might—but to date have not—had a major impact on efforts to preserve the benefits of NAFTA. Finally, Part IV constitutes a conclusion and recommendations for treatment of the noted institutions as part of a NAFTA renegotiation.

The positions of the NAFTA parties have only partially emerged through seven negotiating rounds occurring between August 2017 and March 2018, but this process has been dominated by U.S. proposals and the reaction of Canada and Mexico to them. For the United States, the initial documents are the summary of the administration’s negotiating objectives, a vague listing presented to Congress on July 17, 2017; the “Opening Statement of USTR Robert Lighthizer at the First Round of NAFTA Negotiations” on August 16, 2017;” and a revised list of negotiating objectives presented to Congress in November 2017. The first document in itself is relatively innocuous, raising major controversy only in suggesting again that one of the U.S. objectives is reduction of trade deficits (unrealistic in a “free” trade agreement), and suggesting elimination of NAFTA’s review of national administrative unfair trade decisions under Chapter 19 (discussed in Part II below), and a few other areas. November’s revised objectives provide a slightly more specific discussion of U.S. government positions, but still leave the details unstated.

Lighthizer’s opening statement, in contrast, is considerably more threatening because of the focus on trade deficits above all else:

“We cannot ignore the huge trade deficits, the lost manufacturing jobs, the businesses that have closed or moved because of incentives—intended or not—in the current agreement ... [O]ver the last 10 years, our deficit in goods has exceeded $365 billion. The views of the President about NAFTA, which I completely share, are well known. I want to be clear that he is not interested in a mere tweaking of a few provisions and a couple of updated chapters. We feel that NAFTA has fundamentally failed many, many Americans and needs major improvement.”

It is relevant here to observe that NAFTA and other free trade agreements (FTAs) cannot by their nature reduce trade deficits, which are effectively a result of a variety of domestic policies such as corporate tax rates and other factors that affect personal and corporate savings rates. As Martin Feldstein, the chairman of President Reagan’s Council of Economic Advisers, has observed, “foreign import barriers and export subsidies are not the reason for the U.S. trade deficit. The real reason is that Americans are spending more than they produce. The overall trade deficit is the result of the saving and investment decisions of U.S. households and businesses.” If the United States insists on seeking to reduce the trade deficit with Mexico primarily through the NAFTA renegotiations, the renegotiations will fail.

The details of the U.S. negotiating positions were most extensively fleshed out in the fourth session in October 2017, but have been repeated in subsequent negotiating sessions. This non-exhaustive list includes:

• U.S. rather than North American content rules for the manufacture of automobiles and perhaps other products, with 82.5 percent of North American content (up from 62.5 percent), including 50 percent U.S. content (including steel and aluminum).

• Limitation of the U.S. government procurement market to the same dollar value as U.S. procurement sales to entities of the other two parties, an impractical restriction given that the U.S. economy is 18-20 times the size of the economies of Mexico or Canada.

• A partial roll-back of U.S. textile and clothing market access through greater restrictions on the use of non-North American fabrics and yarns.

• Increases in the so-called “unfair” trade remedy protection for U.S. growers against imports of labor-intensive winter fruits and vegetables such as tomatoes and berries from Mexico. (This is apparently designed to counteract Mexico’s comparative advantages in labor costs, lower humidity, and a more favorable winter climate.)

• Removal of the highly contentious provisions in NAFTA that permit Mexican and United States cross-border carriage of goods by motor freight on a reciprocal basis.

• A “sunset” provision under which a revised NAFTA could be reviewed and terminated by the United States after five years on the basis of as yet undefined criteria, throwing the entire process into further uncertainty.

• Elimination of Chapter 19 (antidumping [AD]/countervailing duty [CVD]) binational panel) protections against unfair trade practice actions imposed by the United States.

• Conversion of state-to-state dispute settlement (Chapter 20) into a less legal and more diplomatic means for resolving disputes over the interpretation and application of NAFTA provisions, by allowing the United States to ignore panel decisions that in the view of the United States are “clearly erroneous.”

• A provision that would allow a party (e.g., the United States) to opt out of investor- state dispute settlement (ISDS) protection for inward investment, without necessarily providing reciprocal protection for the governments of Mexico and Canada.

Only the last three items in this list address dispute settlement directly. However, the full list is reproduced here because several of the other items—including those relating to autos and auto parts; textiles and clothing; fruit and vegetables; and cross-border trucking—will have a disproportionate impact on the Mexican border if the changes are accepted by Canada and Mexico or, more likely, if Canadian and Mexican refusals lead to the dissolution of NAFTA.

Also relevant are the negotiating objectives set out on the current Trade Promotion Authority (TPA) legislation enacted in 2015, which contains inter alia negotiating objectives agreed upon by the Congress and the Obama administration, many of which were incorporated into the Trans-Pacific Partnership (TPP). (It is unclear to what extent these objectives are consistent with as yet unarticulated Trump administration objectives in the NAFTA renegotiation.) Discussions of the positions of the Canadian and Mexican governments are drawn primarily from public statements of various officials. A further likely major source of changes in the NAFTA text is found in the provisions of the Trans-Pacific Partnership, since all three NAFTA parties participated in the negotiations and signed the TPP (even though the Trump administration has withdrawn). Both Mexican and U.S. officials have suggested that the TPP provisions could be used as a “starting point” for the NAFTA renegotiation.

A strong word of caution is in order. At this writing, March 2018, the formal NAFTA negotiations have been underway for only seven months, and few contentious issues appear to have been agreed upon. It is thus impossible at this time to predict what changes, if any, will accepted by the three NAFTA parties in these institutions, whether a single revised NAFTA will be agreed upon, whether NAFTA will be divided into two bilateral agreements between the United States and Canada and the United States and Mexico, or whether after failure of the negotiations NAFTA will be terminated between the United States and one or both of the NAFTA parties. Whether or not a revised NAFTA can be approved by the U.S. Congress is also an open question, given that NAFTA remains unpopular and deeply controversial in Congress. It is also impossible to know how long the negotiations will last. While the Trump administration hoped that the negotiations could be concluded by December 31, 2017, the deadline was extended to March 31, 2018—and the negotiations may not be concluded until early 2019, given the difficulties of effectively negotiating during Mexico’s presidential campaign (April-June 2018) and the U.S. congressional campaign (March into November 2018).

Moreover, there remains throughout the negotiations a risk that the administration will become impatient with the progress (or lack thereof) and simply notify Canada and Mexico that the United States is withdrawing from NAFTA, as the president has threatened on numerous occasions, as on October 25, 2017, to give notice of U.S. withdrawal from NAFTA (perhaps as a highly risky negotiating tactic).

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.