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Posts Tagged ‘NAFTA’

I don’t want to write about Trump’s new NAFTA deal (which now has the clunky acronym of USMCA), largely because not much changed since the partial deal with Mexico was unveiled.

Also, it’s hard to get too worked up about the new agreement since it largely tinkers with the status quo. And since I was a fan of NAFTA, I’m relieved Trump didn’t eviscerate that pact.

But several experts have produced very good summaries, which means I can be lazy and share their good work.

Let’s start with Jeffrey Schott of the Peterson Institute, who is underwhelmed by the revised NAFTA.

NAFTA’s benefits had always been primarily through the strengthening of economic integration of the three economies. Contrary to President Trump’s claims, the new pact moves backwards in this critical regard and imposes new restrictions that will impede regional trade and investment, stifling the potential for economic growth. On autos, the deal is innovative in a perverse way: It is the first free trade agreement (FTA) negotiated by the United States that raises rather than lowers barriers to trade and investment. It adds layer upon layer of costly new regulations that producers must follow to qualify for NAFTA’s low tariffs—layers virtually certain to drive up costs of autos for consumers and very likely reduce US jobs in the auto sector. …these steps add up to a step backwards on trade and investment in the United States and the region as a whole that, while not as damaging as it could have been, will do little or nothing to help workers, consumers, and the economies of North America.

Veronique de Rugy of the Mercatus Center is similarly dour, though thankful that the deal isn’t as bad as Trump wanted.

…the Trump administration gave up on its worst demands, including one for a minimum of 50 percent mandatory U.S. content to benefit from the new NAFTA duty-free treatment, a ban on student visas for Chinese nationals and an every-five-year sunset clause. If the U.S. hadn’t dropped these poison pills, I doubt we would have had this new deal. Let’s all be grateful for the willingness to compromise on the part of the U.S. trade negotiators. …in spite of the tiny trade-liberalization measures in the deal, tariffs overall remain significantly higher than they were before president Trump started “negotiating.” …The auto section of the deal is not as bad as what the Trump administration had hoped for, but it is still really ugly. For automobiles to enter the U.S. duty-free from North America, at least 75 percent of their content must originate in the U.S., Mexico, and Canada, up from the current 62.5 percent. It doesn’t take a rocket scientist to understand that this requirement will increase the price that Americans pay.

Ryan Young of the Competitive Enterprise Institute piles on.

Given the Trump administration’s emphasis on government-managed trade, it could have been much worse. Now President Trump can claim a political victory and hopefully turn his attention to non-trade issues, while actual trade policy remains mostly unchanged. …The 1,812-page agreement leaves intact the mostly tariff-free relationship between the U.S., Canada, and Mexico. It even has a few improvements, such as a slight liberalization of Canada’s dairy policy. U.S. agriculture policy will remain heavily subsidized and insulated from competition, however. Among the downsides are new wage and country-of-origin rules that will make cars more expensive… Also troubling is a general NAFTA/USMCA ethos under which some countries determine other countries’ regulatory policies for them. This is generally due to trade-unrelated policies in trade agreements, mostly on labor, environmental, and intellectual property issues. …In short, NAFTA has a new name, but it’s still NAFTA. …a major bullet has been dodged between America and two of its largest trading partners. That the Trump administration is calling it a victory means that a major economic loss has been avoided for the time being. It would have been better to leave well enough alone, but under the circumstances, this may be about the best possible outcome.

Simon Lester and Inu Manak grade the new deal, citing good news on agriculture and bad news on labor regulation and autos.

In terms of liberalization in the USMCA, the most important component is the liberalization of Canadian agriculture imports, such as dairy products, eggs, wheat, poultry, and wine. Dairy market access was a key concern for the United States, which has long complained about Canada’s strict supply management and quota system. …In addition, Canada agreed to give up a pricing system for certain types of milk, as well as expanding the U.S. quota for chicken, eggs, and turkey. …The labor rights provisions go further than past U.S. trade agreements. For some people on the left, this could offer a reason to support the agreement. If you are skeptical about including labor provisions in trade agreements, as we are, this is a negative aspect to the agreement. …The new rules of origin are extremely restrictive, raising costs for auto production in North America. This could lead to more production being done outside of North America, or higher costs for consumers. This is the most negative part of the new agreement.

Speaking of all the new command-and-control regulation in the USMCA, this tweet from Scott Linicome sums up one of the great ironies of the NAFTA revision.

William Reinsch of the Center for Strategic and International Studies adds his two cents, mostly noting that we’re lucky Trump didn’t make things that much worse (a common theme from all the experts).

It is somewhat comforting to see that one of the worst things you can say about U.S.-Mexico-Canada Agreement (USMCA) is that the new trade agreement replaces a term that everyone knows and can say with an unpronounceable acronym. …the business communities in all three countries dodged a serious bullet. …no one had to swallow many of the so-called poison pills. …The fact that many of its efforts to build an economic wall around the United States did not make it to the finish line is also good news, although the Canadians and Mexicans probably deserve more credit for that than our administration does.

Let’s close with some optimism. Dalibor Rohac of the American Enterprise Institute writes for CapX that the new pact shows that Trump’s protectionist instincts can be sidetracked.

…considering the range of possible outcomes, a sigh of relief is in order. President Trump’s zero-sum view of the world and his penchant for grand gestures and publicity stunts created a real risk that NAFTA – one of the great successes of trade liberalisation around the world – would follow the fate of other agreements from which his administration decided to withdraw. Forcing higher wages and labour protection standards on a relatively poor country such as Mexico will have unintended consequences, but that is likely an acceptable price for keeping trade in North America tariff-free. …USMCA shows how President Trump’s protectionism can be constrained by other world leaders: by letting the US President score easy headline-grabbing victories, which will allow him to claim that he has ‘fixed’ previously ‘horrible’ trade deals, while leaving the substance of policies mostly unchanged.

Needless to say, this doesn’t cast Trump in a positive light.

I’ll close by restating a point I made in August about, “The process of NAFTA began under Reagan, negotiations finished under the first President Bush…, and the pact was approved under Clinton.”

And American workers were beneficiaries, though Trump put 1.8 million jobs at risk by threatening to deep six that achievement.

Thankfully, it looks like NAFTA will largely survive Trump.

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Remember the big debate about whether Trump was a closet free trader or a crude protectionist?

Some people claimed he was imposing tariffs and threatening other nations in order to get them to reduce trade barriers.

From the beginning, I was skeptical of this argument, but also acknowledged that we wouldn’t know for sure until we saw a Trump-negotiated deal.

Well, I point out in this interview that my skepticism was warranted. Trump unveiled a quasi-deal on NAFTA yesterday, and it unquestionably will reduce economic liberty.

There’s a lot we still don’t know. Especially about whether this new agreement will actually get approved.

But Claude Barfield of the American Enterprise Institute has a very succinct explanation of the good and bad. He agree with me that it’s good to remove uncertainty.

(1) The best thing about the agreement — if it holds — is that it will remove the extreme uncertainty for businesses in all three NAFTA economies.

And I’m guessing he also agrees that a weakened NAFTA is better than no NAFTA.

By the way, Administration officials have told me that there are a few good provisions, involving matters such as digital goods and property rights.

But Barfield’s list of bad provisions easily trumps (no pun intended) any positive changes.

(2) The tentative “rules of origin” provisions for autos are an abomination — so complex and anti-competitive that they invite endless litigation and corruption (rules of origin govern what percentage of a final product must come from the three NAFTA nations).

(3) The old NAFTA dispute settlement system for investors has been gutted, leaving US industry and Congress with a huge dilemma as to whether to support the new pact.

(4) The auto/labor provisions (forcing Mexico to pay workers $16/hour for a number of jobs in Mexican auto plants, or four times the average hourly pay in Mexico) is a terrible precedent for mandating changes in domestic policy through a trade agreement.

Point #4 is especially terrible. It basically seeks to set wage levels above productivity levels in Mexico, which is a recipe for more unemployment in that already shaky economy (by the way, someone should tell Trump this will lead to more illegal migration from Mexico to the U.S.).

This is the same theory that the French and Germans use when trying to undermine tax competition. It’s supposedly unfair, they argue, when other countries have lower tax rates.

The bottom line is that Trump is hurting America. NAFTA has been good news for the United States, producing more jobs, more exports, and higher living standards.

When grading Trump’s overall economic policy, we just got a big chunk of bad policy to offset some of the good policy.

Sad!

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There’s a debate in Washington about what President Trump really thinks about trade. Is he a crude protectionist or closet free trader?

If we focus on actions rather than rhetoric, I fear Trump is in the anti-trade camp. That is certainly the case if we look at how the Administration wants to alter the North American Free Trade Agreement. I was interviewed yesterday and here’s what I said about Trump and NAFTA.

By the way, even though I’ve previously defended NAFTA, I would like to see changes to the deal. The pact, which drags on for 1700 pages, isn’t genuine free trade.

An ideal agreement would contain just one sentence: “Mexicans and Canadians are free to buy goods and services from Americans, and Americans are free to buy goods and services from Mexicans and Canadians.”

Unfortunately, the Trump Administration wants to modify NAFTA in the other direction.

Clark Packard of the R Street Institute discusses this problem in a column for National Review.

…the administration should resolve NAFTA quickly. But a toxic mix of political miscalculations and bad policy is threatening to push that goal out of reach. U.S. Trade Representative Robert Lighthizer wants to remove the investor–state dispute-settlement process (ISDS) from NAFTA 2.0. ISDS provides neutral arbitration to settle disputes between private investors and governmental parties to NAFTA. For example, if the Mexican government expropriated an oil field owned by an American firm, ISDS would permit the American firm to seek compensation from the Mexican government in an arbitration process rather than seek redress in a Mexican court. …removing the process from NAFTA 2.0 would be a political miscalculation. …Another troublesome demand the United States is making in NAFTA negotiations is the inclusion of a so-called sunset clause that would terminate the agreement after five years unless all three countries affirmatively renew it. This is an unpopular idea on Capitol Hill and is a non-starter for Mexico and Canada, with good reason. Investment thrives in predictable environments. …the United States suggested lowering the regional-content threshold to 70 percent and requiring that 40 to 45 percent of an automobile must be produced by autoworkers making at least $16 per hour. …If manufacturers complied with this proposed requirement, their costs would skyrocket and consumers would face higher prices at the dealership. …manufacturers would forgo duty-free trading under NAFTA by sourcing parts from non-NAFTA countries and paying wages below $16 an hour, and then simply paying the small U.S. tariff on automobiles.

And here’s a good explanation, from Gary Clyde Hufbauer, of why NAFTA is a big plus for the American economy.

The North American Free Trade Agreement (NAFTA) has benefited American consumers, workers and businesses since 1994. …Some 14 million US jobs depend on the agreement with our nation’s two largest export markets, Canada and Mexico. Together, these countries spend nearly $500 billion purchasing US exports annually. …The Peterson Institute’s research shows that overseas investment is an engine for American job creation. For example, case studies in Mexico show a win-win relationship from establishing research and development facilities outside the United States: Every 131 jobs added in Mexico lead to 333 jobs created here at home. …NAFTA has fostered robust growth in agricultural exports over the past 24 years.

The bottom line, as I’ve explained many times, is that Trump will be undermining the benefits of the good things he’s accomplished – such as last year’s tax plan – if he insists on imposing higher taxes on trade. Protectionism isn’t just bad for taxpayers, exporters, consumers, and manufacturers. It’s also a net job destroyer.

The process of NAFTA began under Reagan, negotiations finished under the first President Bush (one of the few good things he did), and the pact was approved under Clinton (one of the many good things that happened during his tenure).

Let’s hope it’s not wrecked under Trump.

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