This article was republished in the June 27, 2017 issue of Inside Counsel (subscription required).
On May 18, United States Trade Representative (USTR) Robert Lighthizer announced the Trump Administration's intent to renegotiate the North American Free Trade Agreement (NAFTA). This signaled 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.
The world has changed considerably since NAFTA entered into force in 1994, and the Administration has emphasized that there are several areas where changes in technology and policy require new consideration or updates. These include digital economy, customs rules and procedures, and regulatory practices.
This is the first time that the U.S. government has re-opened a bilateral or regional free trade agreement in the WTO era, and it creates a tremendous opportunity to modernize and develop new North American approaches in areas important to our collective economies. Moreover, 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. The negotiations – particularly in new areas – will be closely watched by the international community, and the outcome 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 (compared to the 435 million people in a European Union without the UK). Canada, Mexico, and the United States also have the largest integrated economy in the world, with shared supply chains and similar consumer preferences. Due to 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 are more likely to be used as a starting point for regulators, customs authorities, and policymakers in other countries.
While U.S. and Canadian regulators have long influenced the global regulatory environment, Mexico has increasingly become an important reference for countries with respect to regulatory coherence (good regulatory practices), regulatory cooperation, and sector-specific regulatory alignment. Indeed, Mexico's network of twelve Free Trade Agreements (plus others in the pipeline) have enabled it to "export" North American approaches to other trading partners.
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 not only trade and investment issues faced by our exporters in North America, but also considers issues that our companies have faced in the markets of other major trading partners.
There are at least three key areas where opportunity exists to reshape the global regulatory and policy environment through NAFTA modernization.
One of the most important areas set out in the Lighthizer letter to Congress is "regulatory practices." Based on recent experience in TPP and the Transatlantic Trade and Investment Partnership negotiations, this could encompass regulatory coherence, regulatory cooperation, and regulatory alignment in specific sectors.
Historically, trade agreements such as NAFTA focused primarily on the need for countries to eliminate regulatory measures that violate trade rules. This can include measures that: discriminate against imported products, are not based on relevant international standards, or are otherwise unjustified. In 2017, however, 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 one country and are not recognized by regulators in other jurisdictions are considerable and are being incurred by consumers, business, and governments. The fact that countries' regulations are different, and require multiple applications of similar administrative requirements, also negatively impacts regional and global supply chains and negatively impacts trade, particularly for small and medium-sized enterprises.
NAFTA modernization provides an opportunity to secure more cooperation among regulators, which could lead to the development of common regulatory approaches and compliance programs and closer alignment of the underlying technical requirements.
To better align how we regulate while not reducing levels of protection requires 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 better aligning implementation and enforcement so that redundant requirements are eliminated, and collaborating on retrospective review.
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, and recommendations, as well as 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 high-level focus of the U.S. and Mexican administrations on regulatory reform should help in these efforts, since regulators will be actively looking to identify potential regulatory cost savings. Regulators' use of standards and conformity assessment systems developed in the private sector, and efforts to increase regulatory alignment with major trading partners, could reduce compliance costs.
Emerging technology issues
The Internet was in its infancy in 1994. Issues such as promoting the free flow of data across borders and freedom of expression online; preserving the global nature of the Internet; allowing Internet users to lawfully access online information and services of their choice; ensuring respect for online privacy and personal data protection; supporting a multi-stakeholder approach to Internet governance; and incentivizing cyber risk management had not yet emerged and thus are not covered by NAFTA.
The NAFTA Parties could negotiate a new NAFTA Chapter on Digital Trade, using the Trans-Pacific Partnership Chapter on Electronic Commerce as a starting point. Those 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, voluntary approach to cybersecurity with an emphasis on risk management; 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 entry into force 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 and building on the TFA and the TPP texts. The chapter could require that, within five years of entry into force, 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 that improve their risk-targeting strategies.
In addition, the chapter could build on the supply chain disciplines set out in the TPP Chapter on Competitiveness and Business Facilitation and make them part of the trade facilitation text. The ability to move cargo from point A to point B in an efficient manner is as critical to trade facilitation as customs administration, and logistics and customs issues are closely intertwined. Our governments should seek to incentivize investment in infrastructure and the use of digital tools 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 Federal Register notice requesting public input to inform the development of U.S. positions and objectives when negotiating the modernization of NAFTA presents the first opportunity to influence the negotiating agenda. While the three governments will develop their negotiating positions over the summer, the FR notice can serve to bring industry stakeholders throughout North America together to shape positions, flag issues of priority and concern, and raise new opportunities, such as those summarized above, for inclusion in a revised agreement. Experience suggests 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 offer welcome counterweights. The stakes in these negotiations could not be higher, but so are the opportunities to work together to create an innovative, 21st century NAFTA.
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Juan Antonio Dorantes, a Partner in the International Trade Group at Aguilar y Loera, is a former Director General and trade negotiator for Mexico's Secretaría de Economía and chair of two WTO committees.
Bob Carberry, principal at Carberry Insights and Associates, is a former Canadian regulator and Assistant Secretary, and served as co-chair and co-founder of the Canada-U.S. Regulatory Cooperation Council while serving in Canada's Privy Council.