Why NAFTA needs an expiration date
Politico | 26 October 2017
Why NAFTA needs an expiration date
By TODD TUCKER
The Trump administration’s recent proposal to insert a sunset clause into the North American Free Trade Agreement shocked just about everyone in the trade world. Under the plan, the three countries would have to renew the agreement every five years—or else it would be terminated. Canadian and Mexican negotiators immediately rejected the idea, arguing that it would create uncertainty for businesses and potentially spell the end for NAFTA. “If every marriage had a five-year sunset clause,” Canada’s ambassador to the U.S said. “I think our divorce rate would be a heck of a lot higher."
These experts are right: Allowing NAFTA to expire every five years without affirmation by all three countries is a bad idea. But a sunset clause isn’t.
Today, most trade deals, like NAFTA, have no expiration dates at all—they lock countries into agreements indefinitely. At one level, this has some benefits: It ensures stability, and gives businesses some long-term planning clarity. But, as is becoming clear, the world changes—in part because of those trade deals—and deals like NAFTA can let important injustices and political tensions build up over the years, with no pressure valve at all. A sunset clause can provide a regular chance to relieve that pressure.
The anxiety over NAFTA right now is largely because it’s so unclear just how it might be renegotiated— leading to worries that a frustrated Trump would just blow the deal up if he can’t make any progress. A less frequent sunset clause—once every 20 to 25 years, for instance—would force countries to examine what is and isn’t working about a deal, creating political pressure to help the losers of trade deals—something that doesn’t exist under the current system. Under traditional trade theory, the people who benefit most from these deals, like multinational corporations and financiers, could compensate the losers, providing money to retrain them for new jobs. But a growing body of evidence has shown that U.S. trade policy over the past 30 years has created real problems for a subset of Americans, notably manufacturing workers in the Midwest. Without any built-in mechanism to force lawmakers to review trade deals, though, such inequities can fester for years with little response from Washington and little help for those who lost their jobs. Eventually, as we saw with last year’s presidential election, this can become socially unsustainable, as an angry electorate lashes out at establishment politicians.
A sunset clause flips the script by putting the onus on the victors to occasionally re-prove the substantive merits of trade agreements, instead of forcing the losers of the agreement to miraculously reverse their fortunes. A sunset clause creates a built-in review mechanism, forcing policymakers to look back on the actual consequences of various trade agreements and if necessary, to adjust policy so that the benefits of trade are spread more evenly. Indeed, legal scholars defend sunset clauses on national security and other matters as a means of promoting accountability, deliberation, and checks on power.
This logic also holds at the international level. Asking a country unhappy with treaty terms to take the first step to renegotiate a trade deal is unfair. The weakest countries risk capital flight if they even suggest a possible termination, a strong disincentive to reform trade deals. A regularly scheduled forum for all sides to air grievances means no one gets blamed for doing so.
There are also two other, more specific reasons for businesses to support a sunset clause. First, it would force businesses to price political uncertainty into their location decisions, ensuring that such decisions are smart even if the political environment changes. In other words, if relocating production from the U.S. to Mexico only makes sense under the current policy environment, then companies should stay put, since policies in both U.S. and Mexico are bound to change. In recent years, too many companies have gotten complacent, expecting globalization to continue apace and refusing to consider what would happen otherwise. By adding a sunset provision into NAFTA, businesses would have to consider that exact situation. Will their investments and business decisions make sense if the trade pact expired or was modified? It’s past time that businesses take into account such political uncertainty.
Second, a sunset clause could, counter-intuitively, actually lower the risk that NAFTA would ever be terminated. Right now, without any regular sunset reviews, the NAFTA renegotiations are creating a sea of uncertainty about whether President Donald Trump can actually unilaterally change NAFTA (he can’t) and what Congress would do if he tried. Routine administrative trade law decisions and leaked slides on the socioeconomic costs of trade are seen as evidence of a pending trade war. If NAFTA instead contained a sunset clause requiring renewal by say 2022, the public would be prepared for the review and not panic as the administration took normal trade actions. Businesses would engage with lawmakers in advance, using their lobbying prowess to educate old and new members alike about the benefits of trade. A more predictable process where the costs and benefits are regularly tallied increases the odds that NAFTA stays in place.
Of course, there is no one-size-fits-all approach to a sunset clause. It could require just the executive branch to reaffirm the deal, lowering the risk that 218 House members could take an unwise but popular action. A sunset could also come with no-penalty extensions. If the U.S. and Mexican officials worry that the 25-year decision would fall at a politically sensitive time, say during a presidential election, they could push back the decision a year or two. Finally, instead of terminating the deal unless all three countries agree, NAFTA 2.0 could be structured like the majority of investment treaties, which are extended past their initial validity period unless all parties disagree. Any of these moderations would allow for more certainty, though at some cost to legitimacy.
In short, a generational sunset is an opportunity to better ground globalization in democracy, as both liberals and conservatives worry that politics has become too sclerotic and unresponsive to the public and populists claim that the international "liberal order" rigs the game even further. A sunset clause—if designed in a balanced way—can act as a safety valve on these beliefs, adding a dose of democracy to a process that many see, rightly or wrongly, as rigged for the elites. As populists rise to power across the West, such a change is exactly what is needed.
Todd Tucker is a fellow at Roosevelt Institute. Follow him @toddntucker.
