The 6th round of the NAFTA talks wrapped up today, and my impression of the closing statements was that everyone was relatively positive, much more so than after the 4th round anyway. I wanted to highlight one thing from Ambassador Lighthizer's statement:
Free trade agreements are essentially grants of preferential treatment to other countries in exchange for an approximately equal grant of preferential treatment in their economy. Thus, it is reasonable from time to time to assess whether the bargain has turned out to be equitable.
Using Canadian statistics, Canada sold the United States $298 billion U.S. dollars in goods in 2016, the last numbers that we have. We sold Canada $210 billion dollars in goods. Now that’s a lot of two-way trade, but it also means that Canada has an over $87 billion U.S. dollar surplus with the United States. To put this in perspective, that figure is equal to approximately 5.7 percent of Canada’s GDP. When energy is removed, and in some people’s opinion that’s a fair thing to do, the number is still $46 billion dollars. The projected figures for 2017 show that the surplus will be even larger when those numbers are in.
Now I ask Canadians because we’re in Canada, is it not fair for us to wonder whether this imbalance could in part be caused by the rules of NAFTA? Would Canada not ask this same question if the situation were reversed? So we need to modernize and we need to rebalance.
My sense is that the "approximately equal grant of preferential treatment" language is a pretty accurate description of what countries try to do with their trade agreements, although there are probably cases where one side gives more than the other because it wants the deal for non-economic reasons or to take into account the developing country status of the other side. From what I can tell, NAFTA is pretty equal in this regard, with all three countries agreeing on approximately equal amounts of liberalization.
The problem here is the way you measure equality. It makes the most sense to look at structural liberalization, that is, how much protectionism each country has wiped off the books. Looking at bilateral trade balances, by contrast, does not tell you much. Here's how Doug Irwin recently put it:
The problem with negotiating about outcomes rather than rules, focusing on the trade balance rather than on market access, is that it can lead to managed trade. ...
President Trump has complained about supposedly unfair trade deals with Japan, Mexico and Canada without ever really saying what they have done wrong—aside from the imbalance in our bilateral trade with them. With Canada, the U.S. does indeed have a trade deficit in goods, but it has an even larger trade surplus in services. Is this “very unfair” to Canada? Are we “taking advantage” of our longtime ally? What would Mr. Trump say if Canada said that we are obligated to intervene to reduce our surplus?
The fixation on outcomes rather than on rules has distorted the U.S. negotiating position. The Trump administration’s aggressive “win-lose” rhetoric not only puts other countries on the defensive but also baffles them, because the trade balance is not something that governments directly control. Emphasizing deficits and surpluses has made our trading partners less willing to negotiate and to make concessions on issues of market access. ...
