Steel and aluminum tariffs levied against Canada, Mexico, and the European Union have strained relationships with our closest allies. The recent announcement from the Trump administration that it would like the North American Free Trade Agreement (NAFTA) to be bilateral arrangements rather than a trilateral agreement only creates more tension.
While it might seem that America’s leverage would be greater in negotiating with one partner instead of two, it’s not. A retreat from a multilateral approach would be a significant change in American trade policy, presenting three sets of risks that could reduce American manufacturing competitiveness, limit our ability to enter into trade agreements of any kind, and begin to throttle international trade.
The reason is simple: American manufacturing is more competitive when our companies can source and sell in legal and regulatory environments that have minimum variations. A multilateral or plurilateral arrangement such as NAFTA, under which all parties make the same commitments to each other, creates a broadly unified business environment. It also reduces the cost of compliance with divergent legal or regulatory requirements in different jurisdictions. Even where governments exclude certain sectors or move toward tariff-free trade at different rates, any convergence of rules and regulations reduces the cost of production.
While it may sound like the U.S. can get a better deal negotiating separately, bilateral agreements inevitably involve diverging rules. These divergences raise costs for American manufacturing and make it harder to compete on the global market.
Moreover, negotiating with countries individually raises the political cost of entering into trade agreements. The U.S. Congress generally does not like trade votes — it puts members on the record about agreements that impact constituents directly. They much prefer to let the president take on this responsibility. How many trade votes has Congress taken in the past ten years? You could count them on one hand. By negotiating with countries individually instead of in groups, we are asking Congress to vote on many more trade-related pieces of legislation. This makes it less likely the United States will be able to conclude any trade agreements.
Finally, NAFTA is a cornerstone of the multilateral structure of the World Trade Organization. To transform NAFTA into bilateral arrangements could lead to general questioning of the multilateral nature of international trade. Multilateral arrangements represent a package of trade-offs that make the nation wealthier and are a “secret sauce” for prosperity because this system contains a bias toward market openings. On the other hand, bilateralism tends to engender vested interests and discourage market openings.
Why would Canada make a deal with us if they know that we can turn around tomorrow and give Mexico a better deal?
Multilateral trade is driven by a concept referred to as “most favored nation” (MFN). Trade is promoted and wealth is created if every trading partner in good standing receives the treatment accorded to their “most favored” trading partner. As a result, any market-access advantage that is granted in a negotiation must eventually be extended to all other trading partners.
In a purely bilateral setting without MFN, there is no incentive to open up markets. Why would Canada make a deal with us if they know that we can turn around tomorrow and give Mexico a better deal?
The U.S. government likes to present its approach as a novel idea that will yield greater prosperity than the approach that the preceding 15 presidents followed. In fact, it represents a return to the trade policy followed by the United States in the period from the end of the Civil War to the Great Depression and the Second World War. It’s no coincidence that the experiment with protectionism, mercantilism, and government-managed trade ended with depression and war: It is a recipe for poverty and conflict.