Ambassador Robert Lighthizer
Office of the U.S. Trade Representative
600 17th Street, NW
Brandon Arnold, Executive Vice President
National Taxpayers Union
25 Massachusetts Avenue, NW, Suite 140
Washington, DC 20001
Negotiating Objectives Regarding Modernization of North American Free Trade Agreement with Canada and Mexico
Docket ID: USTR-2017-0006
Founded in 1969, National Taxpayers Union (NTU) is the oldest taxpayer group in the United States. We serve as the “Voice of America’s Taxpayers” and strive to represent their best interests before governments at all levels. Today, I am pleased to testify on the challenges and opportunities posed by renegotiation of the North American Free Trade Agreement (NAFTA).
I. Ensure Tariff Levels Do Not Increase
NTU has a long history of opposing unnecessary tariffs. As with other types of taxes, tariffs result in higher costs that are borne primarily by consumers. One of NAFTA’s crowning achievements was zeroing out nearly all tariffs that existed between the U.S., Canada, and Mexico. As we consider renegotiation goals, it is essential to recognize that tariff increases are not in the best interest of the United States as they restrict the free flow of goods and services, causing economic distortions and inefficiency. Importantly, tariffs hurt businesses and consumers as they create deadweight loss. Data indicate that a 35 percent across-the-board tariff on Mexican imports would lead to a deadweight loss of $40 billion annually, or $200 billion over 5 years. Such a loss would assuredly make our economy worse off by reducing our economic welfare through reductions in jobs, income, and GDP.
Tariffs hurt the competitiveness and profitability of U.S. firms, which decreases the opportunity to reach new markets for exports. Economists estimate that a 10 percent tariff, which is lower than the President’s proposed rate, would add $110 billion in costs to U.S. businesses. Should Mexico respond accordingly with tariffs at the rate the administration has proposed; estimates indicate there would be a 76 percent drop in exports from $218 billion to $56 billion. This would have a detrimental impact on the U.S. steel industry, which has benefitted immensely from NAFTA, as 90 percent of all U.S. steel exports are to Canada and Mexico.
Tariffs would also hurt the productivity and profitability of the automobile industry. Adjusting for inflation, in 1993, the U.S. sold only $10 billion in cars and parts to Mexico, however, by 2013, that figure increased seven-fold to nearly $70 billion. Tariffs are regressives taxes, meaning they disproportionately impact lower-income families who spend a greater proportion of their budget on often imported, basic consumer goods. The President’s proposed tariff is analogous to a tax increase, which experts indicate will increase the cost of basic goods by nearly 10 percent on the poorest 10 percent of Americans. Over five years, the poorest 10 percent would face an additional $2,000 in costs on these goods.
II. Reduce Non-Tariff Barriers
NTU supports efforts to eliminate Non-Tariff Barriers (NTBs), which inhibit cross-border transactions. Complex rules like duplicative testing, quotas, permitting, and licensing barriers hurt U.S. companies and foreign consumers. Removal of protectionist NTBs will reduce artificial deterrents to economic growth by enabling greater specialization and innovation and improve gains from trade. Additionally, the three countries should agree to reduce market-distorting subsidies and agree to open up protected domestic markets to international competition.
Canada’s import market for dairy and poultry products is highly restrictive due to quota limitations. Consequently, due to a lack of pricing competition, U.S. agricultural suppliers are losing out on potential buyers and Canadian consumers are paying a higher price for food. Mexico, for example, provides local sugar suppliers with heavy subsidies, undercutting U.S. sugar producers from selling in both Mexico and the U.S. Modernization of the agreementshould ensure a level playing field for all three countries, promote additional trade, and support jobs and the economy in the U.S.
III. Reform Rules of Origin Requirements
Rules of Origin requirements are intended to facilitate free trade, not hinder it. Convoluted Rules of Origin expand inefficiencies through burdensome and complex regulations, increasing the costs of trade and thus reducing the level thereof. To achieve their stated purpose and enable maximum resource utilization and efficiency, the USTR should work to streamline these rules and support a uniform application to all products with a simple, flat regional content rule.
These rules increase production and administrative costs which greatly affect the competitiveness of small and medium sized U.S. firms. This means some firms are left behind and are not able to participate in cross-border trade. Specifically, small businesses lack the legal manpower and economies of scale on the Rules of Origin certification process. This process essentially produces a barrier to entry for small businesses due to the added costs of documenting origin, discouraging exporting and limiting revenue and job creation.
Increasing Rules of Origin requirements would threaten vital supply chains and force companies to acquire new, more expensive suppliers, and allocate more resources for these additional costs. The automotive industry, which accounts for 25 percent of trade between the U.S. and Mexico depends on low-cost inputs from non-NAFTA countries to keep costs low and remain globally competitive. Foreign car companies have noted this advantage and have doubled their workforce in the U.S. since the enactment of NAFTA. Increasing percentage requirements would impose higher costs and greater instability on their global supply chains, threatening jobs and raising prices on consumers.
IV. Recognize the Importance of Canada-U.S.-Mexico Relationship
Our neighbors to the North and South remain the top export destinations for U.S. produced goods. Last year, U.S. firms exported $230 billion and $267 billion to Mexico and Canada respectively. Since the enactment of NAFTA in 1993, U.S. exports to Mexico are up 455 percent and up 165 percent to Canada. Furthermore, Canada or Mexico is the top-export destination 8 for 39 U.S. states, supporting 14 million jobs which rely on trade with our two neighbors. Additionally, upwards of 200,000 jobs are created in export sector annually that pay, on average, 15 to 20 percent more than the jobs that were outsourced. A strong North American relationship is in our national security interest as NAFTA grants the U.S. preferential access to oil. Without this access, the U.S. would have to import oil at a higher cost, possibly from countries that are not as friendly as Canada or Mexico.
American businesses have become tightly integrated with our southern neighbor. While firms have outsourced some low-skilled work to Mexico, NAFTA lowered the opportunity cost for American businesses to develop more complex supply chains here in the U.S. Integration with our neighbors has created a symbiotic relationship with supply chains and markets, meaning a disruption of a neighbor’s economy would cause economic harm to industry in the U.S. While the costs of NAFTA are concentrated and may appear more pronounced than the dispersed benefits, it is still abundantly clear millions of well-paying jobs depend on a friendly relationship between our countries.
In conclusion, NAFTA is an incredibly important agreement to our nation’s taxpayers and the economy at large. A modernized and refined NAFTA could spur additional economic growth and prosperity for all three nations. However, NTU is extremely concerned about the threat of moving away from NAFTA’s core objective of increasing free and open trade. Embracing protectionist measures, as described above, could prove economically ruinous. Taxpayers are already overburdened and should not be forced to bear additional economic costs that would result from protectionist trade policies.
Executive Vice President