Trump, take your smart regulation cuts to NAFTA negotiations

Countries negotiate trade agreements in order to advance their own economic interests. The U.S. push to re-negotiate the North American Free Trade Agreement (NAFTA) is no exception.

The Trump administration sees narrowing the trade deficit as an essential outcome of a re-made NAFTA. There has thus been much discussion about what needs to be “fixed” in the existing rules.

Because securing this outcome requires growing U.S. exports, an updated NAFTA must also address new issues. At the top of this list are the many regulatory divergences among the U.S., Canada and Mexico.

{mosads}On the domestic front, President Trump has argued that burdensome regulations are key impediments to the ability of U.S. firms to prosper. Consequently, his administration has launched a wide-ranging regulatory review and simplification process.

America would benefit from taking this same bold approach into the NAFTA negotiations. Regulatory divergences impose significant costs and create disadvantages for U.S. companies seeking to do business in Canada and Mexico.

It therefore behoves the administration to include mechanisms within the new NAFTA that will allow for bold forward steps on regulatory cooperation. The goal is to align and simplify as many new and existing economically significant regulations as is practicable.

To date, the U.S. negotiators seem to be proposing something akin to a re-heated version of the now-defunct Trans-Pacific Partnership (TPP) regulatory chapter. “Good Regulatory Practices,” including transparency and stakeholder engagement, were the foundation of the TPP chapter and must be the foundation of the new NAFTA chapter. Yet, the levels of trade interconnectedness as well as the similarities among the strong, open, and evidence-based regulatory systems across the three countries necessitate a much greater level ambition.

The vast web of production networks across North America means U.S. content accounts for a substantial percentage of the value of Mexican and Canadian exports – an estimated 40 percent and 25 percent, respectively. By contrast, the value of U.S. content in Chinese exports to the United States is 4 percent. Higher U.S. content levels mean that the payoff to U.S. exporters from regulatory cooperation within North America is much greater than with Asia or Europe.

Since 2011, the United States has had bilateral regulatory cooperation processes with Canada and Mexico. It is fair to say that there have been divergent levels of progress, with the U.S.-Canada Regulatory Cooperation Council process moving much further and faster than its U.S.-Mexico counterpart. While there have been some successes in the U.S.-Canada Council, it also is fair to say that neither process has delivered the necessary progress in aligning and simplifying regulations across the continent that impose unnecessary costs on business.

The NAFTA re-negotiation must embed the concept of regulatory cooperation in the agreement along with mandates and procedures that would force agencies and departments across the government to genuinely deliver on regulatory simplification and alignment objectives.

The architecture of the chapter will be crucially important. While NAFTA will generally be a trilateral agreement, its regulatory cooperation component is more conducive to three bilateral approaches at this time: U.S.-Canada, U.S.-Mexico and Canada-Mexico.

Ideally, the three countries could develop an over-arching regulatory council in future. Yet, the divergent levels of progress in recent years between the U.S.-Canada and U.S.-Mexico regulatory cooperation processes clearly demonstrate that forcing a trilateral approach could slow progress to the lowest common denominator. This would not be good for anyone.

In operationalizing a more ambitious approach to regulatory cooperation in North America, the Office of Information and Regulatory Affairs (OIRA) will be crucial. It should be given the authority to force U.S. departments and agencies to deliver on regulatory cooperation priorities jointly identified with NAFTA partners.

OIRA also should be empowered to provide a structured process through which the business community can submit regulations for proposed alignment, including a clear follow up process within the U.S. Government and vis-a-vis the NAFTA partner in question.

The Trump administration has strongly argued that a facilitative regulatory environment is necessary for firms looking to grow their businesses in the United States. A conducive regulatory environment is no less important to U.S. firms seeking to sell more to Canada and Mexico.

NAFTA re-negotiation offers a tremendous opportunity to make the North American regulatory environment great for everybody. Let us seize it.

Eric Miller is a Global Fellow at the Woodrow Wilson Center and a Fellow with the Stimson Center’s “Trade in the 21st Century Program.”