Success is possible, but don’t rule out a collapse of NAFTA talks
The NAFTA renegotiations — long promised by President Donald Trump — are about to start. We have never renegotiated a trade agreement before, and this is our largest and most important by far.
There are reasons to be deeply worried about the outcome. Trump’s history on trade and the administration’s declared priorities in reworking the North American Free Trade Agreement create a bleak backdrop for the Aug. 16 launch of renegotiation talks.
The optimists’ playbook on the president has been, “watch his actions, not his words.” We now have had six months of actions — backed up by decades of words — and the verdict is in on Trump and trade: He is the most unorthodox and nationalist president of the modern era.
The president’s words on trade could not be more stark. NAFTA is “the worst trade deal in the history of the world,” right up there with the Trans-Pacific Partnership (TPP), “another disaster done and pushed by special interests who want to rape our country.”
Nor are his views recent or lightly held. Indeed, trade — along with his other signature issue, immigration — stand out as remarkably stable strands in his worldview. They are two steel rods in the shifting sands of his words and policies, visible through the decades and connecting strongly to Trump’s base. In 1987, Trump spent nearly $100,000 to take out a full-page ads in major newspapers — and his words then match his words today.
Since his inauguration, Trump’s words are becoming actions. In the first week of his presidency, he withdrew from the TPP and his intent to renegotiate NAFTA. In April, he toyed with pulling the United States out of NAFTA altogether. He has issued eight executive actions to “protect” us from trade.
And now we have the administration’s long-awaited “Summary of Objectives for the NAFTA Renegotiation.” Our partners in Mexico and Canada hope for straightforward negotiations as the talks start this month, and even conclusion by year’s end.
Hope is natural, but the realities of the U.S. objectives cannot be overlooked. True, much of the document is straight out of the trade wonk’s script: borrowing from other recent negotiations, including the TPP (irony of ironies), and “modernizing” this 23-year-old agreement.
But what makes the NAFTA objectives — and the upcoming talks — so exceptional, even radical, is the very first objective: “Improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.” This is new and unique. As the accompanying news release puts it, “for the first time USTR has included deficit reduction as a specific objective for the NAFTA negotiations.”
Trump’s single-minded focus on bilateral trade deficits puzzles mainstream economists, whose assessment is that they mean little on their own and instead reflect deeper issues such as savings and consumption rates rather than inherent unfairness. Nevertheless, deficit reduction surfaces over and over in the president’s thinking — back to 1987, remember — and it is now officially Objective No. 1, for NAFTA and no doubt all future Trump trade talks.
What impact will Objective No. 1 have on the negotiations? Well, our trade deficit with Mexico is approximately $60 billion. Although the objectives assert that the United States will seek to reduce that deficit by expanding U.S. exports, Mexico’s economy is comparatively small and its citizens’ and businesses’ purchasing power comparatively limited. Can Mexico afford to buy $60 billion more from us rather than producing it themselves? Voluntarily? That equals 6 per cent of its total gross domestic product. Doubtful.
There are only three sure ways to reduce a trade deficit as large as Mexico’s, and they would do so by brute force: tariffs, quotas or managed trade, such as the “voluntary” restrictions on Japanese auto and semiconductor imports back in the 1980s. These blunt instruments are anathema to the much smaller economies of Canada and Mexico, and indeed to all of our trading partners. Add the issue of the wall, and the outlook can only be bleak.
If the NAFTA talks that begin this week are an “arena” where nations “compete for advantage,” as the president’s aides have described the president’s “cleareyed” worldview, and the president’s unchanging and unyielding views on trade are now officially Objective No. 1 — then no one should expect a normal negotiation, and no one should rule out collapse.
If the administration surprises and the talks go well, we would wind up with a modernized NAFTA well-suited to the 21st century. But if the talks fall apart, then our relations with our closest neighbours would be shattered, supply lines across our continent sundered, and our borders north and south thickened. North America would enter a new era riven with trade barriers, tariffs and mutual suspicion.
And the winner in all this would be China, no longer competing against a unified and efficient North American manufacturing platform and a gigantic internal market. So just as when Trump pulled us out of the TPP and the Paris climate change accord, the global benefactor may well be the very country against whom Trump directed so much of his campaign rhetoric.
Trump wants to put America First. Instead, he may be helping ensure a China Next.