Wednesday, August 01, 2018

How to nail the NAFTA sunset clause sticking point

Mexico is showing realism with its latest move towards recognizing that the American administration wanted a different trade agreement, based on fair trade (and not just free trade), and that puts an end to the flight to the bottom of the wage scale.

Mexico is prepared to commit to conditions that will force an agreed percentage of auto content to be made by workers earning higher wages than the pittances the big auto companies are paying Mexican auto workers, as this Reuters article spells out:

Speaking to local media on Tuesday, Mexican Economy Minister Ildefonso Guajardo also suggested that negotiators have made progress on auto salaries. U.S. and Canadian trade unions have complained that more manufacturing has gravitated to Mexico due to the country’s low wages.

Mexico balked at the prospect of foreign intervention in salaries, but the debate has shifted, Guajardo said.

“Now what we are talking about is that a percentage of what is made in North America would be made in a high-salary zone,” he said. “What does this mean? That clearly, within the component of 100 percent of an automobile made in (the NAFTA zone), a percentage, it could be about 35 to 40 percent, is made in a high-salary zone.” 

This move by Mexico was inevitable, as Trump holds all the cards in the NAFTA renegotiation.

How to solve the Sunset Clause difference:

The major sticking point now is the 5-year sunset clause that Trump wants. Canada and Mexico are resisting this.

Trump will win on this point as well.

However, there is a way for Canada to permit a 5-year sunset clause to be agreed to, provided that certain conditions are met. 

The conditions must meet America’s wish to revisit NAFTA in 5 years time so as to assess yet again if NAFTA is indeed creating more auto manufacturing jobs in the USA.

Incorporate 3 Major Aims:

My suggestion is that Canada agree to a clause which allows any one of the three parties to NAFTA to terminate the agreement after 5 years if they are not satisfied with progress towards the reaching of two or three Major Aims, to be included as part of the new NAFTA.

The most important Major Aim should be an agreed timetable, extending over 5-yearly periods, for wages in Mexico to rise to various levels of the average of American and Canadian auto wages over that period. The express objective is for Mexican wages to be equal to that average in, say, 15 years time.
In the beginning of the 5th year of the new NAFTA agreement, all 3 countries will appoint representatives to examine the progress towards the increased wage Major Aim, and towards the other two Major Aims. If the Major Aims are not achieved, then all 3 countries will enter into non-binding discussions on what might be needed to achieve the Major Aims within future agreed periods.

Termination rights of any country:

If any of the 3 countries does not agree to any suggestions made, and no agreement is reached by all 3 parties, then any of the 3 countries may give 18 months notice from the end of the first 5 year renewal period of its intention to exit the agreement. If that country’s needs are not met by the end of that 18-month notice period, NAFTA will then terminate.

If all 3 countries reach agreement, then the new NAFTA continues without any termination. However, every 5 years the same assessment of progress towards achieving the Major Aims continues, with the same 18 month termination right.

So we will end up with an agreement that is permanent unless terminated, rather than one that is terminated unless renewed.

Needs met by the proposed Sunset Clause:

The major needs of the USA will be captured in the 2 or 3 Major Aims. Unless the USA is satisfied with progress towards meeting those Major Aims, it will be able to exit the agreement.

This should meet Trump’s needs.

Finally, the name should be changed to the North American Fair Trade Agreement, by dropping the word “Free” and using “Fair”.

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