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Analysis: What’s at stake in NAFTA renegotiation?

Editor’s Note: The Trump administration starts to renegotiate the North American Free Trade Agreement with Canada and Mexico on Wednesday.

During the 1992 presidential campaign, independent candidate Ross Perot, a Texas billionaire with a gift for folksy phrases, put an obscure trade deal between the U.S., Canada and Mexico smack into the heat of the American political debate.

At the time, President George H.W. Bush was wrapping up the details of a North American Free Trade Agreement that came to be known in political parlance by its acronym, NAFTA. In the three-way debates with Mr. Bush and Democratic candidate Bill Clinton that fall, Perot said the accord would create “a giant sucking sound” of American jobs going south to cheaper-labor Mexico. Perot came in third in the presidential race to Arkansas Governor Clinton, who also had expressed doubts about the deal and suggested it be renegotiated.

Instead, as president in 1993, Mr. Clinton pushed ahead for congressional approval of NAFTA, winning only by 34 votes in a House controlled by sharply divided Democrats. Many of them were taking their cue from a bitterly opposed union leadership. Republicans gave Mr. Clinton the margin of victory in both the House and Senate.

Fast forward 24 years to the 2016 presidential election and the victory of Republican Donald Trump in normally industrial states, a victory partly propelled by his vehement opposition to NAFTA. One of his favorite speech lines was to describe NAFTA as the “worst trade deal ever made by this country.” Thousands of blue collar workers responded to the message that the U.S. lost about 700,000 manufacturing jobs to Mexico since NAFTA went into effect in 1994.

The economics have changed as much the politics. In 1993, trade between the three countries was a relatively modest $337 billion. It is now nearly $2 trillion. According to Carla Hills, who negotiated NAFTA for the Bush administration, Canada and Mexico are now among the top three U.S. trading partners, and the U.S. sells more to Mexico ($229.7 billion) than to Germany, France, the United Kingdom and Netherlands combined.

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When Mr. Trump came into the White House in January, he talked of scrapping the agreement that now covers almost a third of total U.S. trade. He was talked out of that by his Agriculture Secretary Sonny Perdue, who pointed out the worst damage would come to rural and farm areas, which also gave the president some of his biggest vote margins. U.S. farm exports to Mexico are valued at close to $12 billion, and senior farm state Republican senators reinforced the message of opposition to ditching NAFTA with three-month delays in confirming Mr. Trump’s choices of Perdue to run the Agriculture Department and Robert Lighthizer as U.S. Special Trade Representative.

Rather than abandoning NAFTA entirely, the Trump administration has decided to re-negotiate the pact. Formal negotiations between the three countries begin on August 16. The obstacles may be formidable (and like most trade issues, mind-numbing).

But that all three will be at the same table was not always a foregone conclusion. Some Canadian politicians and academics, wanted to separate Canada from Mexico and do a direct deal with the United States, as existed before NAFTA. Even President Trump, in a now publicized phone call with Mexican President Enrique Pena Nieto, said he had few problems with Canada. But then on a subsequent trip to Wisconsin, Mr. Trump said there were problems, especially over trade rules affecting diary and soft lumber. So for the moment, the talks are three-way.

The Trump administration set out its negotiating goals in a July 17 statement and top among them was reducing the trade deficit (small with Canada, large with Mexico). Most economists on the left and right suggest that is the wrong goal, but clearly it obsesses the president. Another major sticking point, especially for Canada, would be to get rid of a dispute-resolving mechanism, which has often ruled against the U.S. since NAFTA came into force.

The Mexican and Canadian governments have not so specifically set out their negotiating targets. But their goals were summed up by their ambassadors to Washington at a recent trade conclave. Canadian Ambassador David MacNaughton said, “do no harm.” His Mexican counterpart Geronimo Gutierrez said he hoped for a “win-win-win” outcome.

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Other objectives for all three, as the Stimson Center’s William Reinsch observed, reflect the aging of the NAFTA accord, such as digital trade and intellectual property, which were barely issues in 1993. And as Commerce Secretary Wilbur Ross noted in a recent talk, the current agreement covers such things as auto parts that no longer exist. But according to Reinsch and other analysts, the administration is proposing to deal with several of the new issues with mechanisms worked out in the Trans-Pacific Partnership deal that the Obama administration negotiated with 11 nations and that Mr. Trump scrubbed in his first days in office. Mexico and Canada were among the TPP countries.

Reinsch said he saw “no poison pills” in the administration’s negotiating document, but warned: “they could well be lurking in the underbrush and will appear later on.”

The U.S. administration has said it hopes to conclude the renegotiation by the end of the year, but that could be tricky. Mexico faces a presidential election next July — a possible incentive to reach a quick deal. But Canadian Prime Minister Justin Trudeau has promised any renegotiation will have to go through potentially time-consuming votes of approval by the country’s provincial governments.