AN INFERIOR DEAL

WILLIAM WATSON

So it seems NAFTA, which you can say in two easy syllables, is on its way to being replaced by the fivesyllable “USMCA,” which stands for “United States Managed Commerce Agreement.” No, sorry. It stands for “United States Mexico Canada Agreement.” Agreement about what it doesn’t actually say. It could be about walls.

Donald Trump says he likes “USMCA” because it includes “USMC,” which stands for United States Marine Corps, which is where General John Kelly, his chief of staff, worked for many years. Maybe the subliminal message to Mexicans and Canadians is that if we don’t like the USMCA, we might have to settle for the USMC. The leathernecks, so-called because of the high leather collars they wore to protect against cutlass slashes, first invaded us in 1776, though the invasion did not take.

In our inelegant way, we economists distinguish between policies that are “first-best,” “second-best,” “third-best” and so on for as high as numbers go. In this context, complete free trade of the sort Donald Trump sometimes says is his ultimate goal would be first-best, NAFTA is second-best, USMCA third-best and no deal fourth-best. No deal would be worst of all because it would involve great uncertainty, although uncertainty will never be in short supply as long as Donald Trump is president.

NAFTA wasn’t “first-best” because it left in place a number of border barriers and special deals for local producers even as it did away with most tariffs (although not our now world-famous 250-per-cent dairy tariffs). On balance, USMCA looks to be inferior to NAFTA because it does more managing of markets, especially big ones like autos, steel and aluminum, that under NAFTA were by and large free.

How big the gaps are between first-, second-, thirdand fourth-best is hard to say. Only speed-readers know what’s in the deal yet. And the deal we have now isn’t the deal we’ll end up with. As it gets fleshed out and then legislated it’s bound to change at least a little. And even after it is finally tied down in law the gaps between “bests” will still be hard to measure, both because economics is not an exact science and because three of the four “bests” (free trade, NAFTA, and no-deal chaos) will be counterfactuals.

The secretary general of the OECD, who I suspect knows nothing more about the details than the rest of us, nevertheless welcomed the USMCA with rhetorically open arms: “The OECD has long supported open markets for trade and investment as a crucial driver of economic growth and jobs. Today’s announcement supports strong growth and good jobs in all three countries; it will boost the confidence of firms and investors by preserving stable and predictable rulesbased trade in North America. It will make the region more productive and more competitive internationally.”

Oh yeah? “More productive and more competitive” compared to what? Compared to no deal? Maybe. Compared to NAFTA? Not likely. USMCA does open at least a couple of our markets a bit more. We’re poised to get the benefit of more — but far from unlimited — dairy imports. And the “de minimis” limit below which we won’t have to pay tariffs on goods we import directly is set to go from $20 to $100. It hasn’t been changed in several inflationary decades so, thank you, Mr. Trump!

But beyond that, other bigger markets become more closed and more managed. We and the Mexicans are no longer free to export as many cars and parts to the U.S. as we want to. We now face the possibility of permanent quotas on steel and aluminum. And private investors lose the protection of Chapter 11, which let them challenge governments that unfairly favoured local investors. If you want foreign investment, as we do, reducing foreign investors’ rights is not a good way to get it.

The trade negotiator for Mexico’s incoming president summarized matters as follows: “You have a whole region that is becoming more protectionist ... and now we are inside the curtain. That’s beneficial for Canada and Mexico.” Yes, for North America’s two smaller countries it’s better to be inside the U.S.’s thickening protectionist curtain than outside. But better there should be no curtain. Better that the vision of NAFTA, the “FT” part — free trade — be the lodestar.

Instead, the goal of North America’s trade regulations is now to manage the three countries’ economies so that the U.S. trade deficit shrinks. It probably won’t work: Trade deficits depend more on national rates of economic growth and saving-investment gaps than they do on tariffs. But it’s hardly an inspiring national goal for our two countries to “Make America’s Trade Deficit Zero Again”.

MORE WILL NOW BECOME MORE CLOSED AND MORE MANAGED.