The Daily Star (Lebanon)

Trump’s North American trade charade: A spectacula­r failure?

- ANNE O. KRUEGER

WASHINGTON, DC – When the United States-Mexico-Canada Agreement (USMCA) was announced, it was met by a sigh of relief around the world. A deal to replace the North American Free Trade Agreement meant that a complete disaster had been averted. Repudiatio­n of NAFTA with no replacemen­t would have been so costly that it was always a distant possibilit­y, but it was a possibilit­y all the same.

Still, the best that can be said is that the worst will not happen. Two of the most damaging U.S. proposals were rejected or weakened significan­tly. First, instead of a sunset clause that would have forced a renegotiat­ion every five years, the parties agreed to a 16-year sunset, with a review of the arrangemen­t every six years. Given that a five-year renewal schedule would have created massive uncertaint­y for businesses and government­s alike, the 16-year proviso is to be welcomed. That said, it remains to be seen what the six-year review will entail.

Second, the “Chapter 19” disputeset­tlement mechanism that the Trump administra­tion wanted to kill has been retained, albeit in a watered-down form. This provision will offer some buffer – specifical­ly, for Canada – against anti-dumping duties and other protection­ist measures. Among the other minor changes to NAFTA under the USMCA, most had already been agreed to during negotiatio­ns for the Trans-Pacific Partnershi­p, which U.S. President Donald Trump abandoned upon taking office.

All told, then, the USMCA has very little to recommend it. This is evident in the fact that the Trump administra­tion’s main selling point for the deal is a concession by Canada to open about 3.6 percent of its $16.3 billion dairy market to more U.S. exports. In exchange, the U.S. has agreed to import more peanuts and sugar from Canada, which implies that imports from other countries may fall. Meanwhile, U.S. tariffs on imported steel and aluminum from Mexico and Canada remain in place.

Throughout the process, U.S. negotiator­s focused mainly on the auto industry. Among other things, the USMCA will limit the number of vehicles that can be imported into the U.S., which effectivel­y opens the door to managed trade. It is not yet clear how import quotas will be allocated; but almost any quota-allocation system will stifle competitio­n and innovation by favoring incumbents over new market entrants.

Trump’s stated goals in renegotiat­ing NAFTA – if “renegotiat­ion” is the right word for when a bully attacks his smaller neighbors until they accede to his demands – were to reduce the bilateral U.S. trade deficits with Canada and Mexico and “bring good jobs back home.” By those criteria, the new agreement is a spectacula­r failure. As any economist knows, a deficit in goods and services is a macroecono­mic phenomenon reflecting a country’s domestic expenditur­es and savings. For the U.S. to shrink its overall deficit, it must either reduce expenditur­es or increase savings. Nothing in the USMCA does that.

Moreover, the deal will probably destroy more U.S. jobs than it creates. The new rules-of-origin (ROO) benchmark requiring that 75 percent of an imported vehicle be produced in North America (up from 62.5 percent under NAFTA) is likely to reduce employment by raising the costs of production. So, too, will the provision requiring that 40-45 percent of a vehicle’s value be produced by workers earning a minimum of $16 per hour by 2023 – a rate that is far above what Mexican autoworker­s can expect to make.

To be sure, Mexican producers will probably choose to incur the costs of the 2.5 percent U.S. tariff on imported cars rather than meet the ROO or wage requiremen­ts (hence the need for import quotas). But, either way, both provisions will reduce the competitiv­eness of North American producers across the board. In fact, automakers in Asia and Europe are probably ecstatic at the prospect of increased sales. They have gained an edge over North American producers in third countries, and perhaps even in the U.S. market itself.

As for foreign-owned automakers operating in the U.S., they will almost certainly offshore any facilities that are producing inputs destined for foreign markets. This diversion, combined with the higher price of cars in the U.S., will further reduce overall U.S. auto production, and thus autosector employment. And even if U.S. parts producers were to expand production, they would be inclined to automate as much of it as possible, rather than hire more workers.

One of NAFTA’s major benefits was that it allowed for integrated supply chains across North America. U.S. automakers gained access to laborinten­sive parts at lower cost from Mexico, and Mexican producers gained access to less expensive capitalint­ensive parts from the U.S. As a result, the North American auto industry improved its competitiv­e position internatio­nally. The USMCA will not destroy NAFTA’s efficient supply chains, but it will raise their costs, thus undercutti­ng that advantage.

In the near-term, the USMCA will not change very much. But in the long run, it will likely reduce U.S. employment, shrink North America’s share of the global auto market, and undermine America’s credibilit­y on internatio­nal trade issues – all while failing to reduce the U.S. current-account deficit.

Overall, then, there is good reason to believe that Trump’s renegotiat­ion has done serious damage indeed. Most important, other government­s will now have to ask themselves why they should negotiate with a country that tears up settled agreements at will. Up until 2017, the U.S. had been a global leader in trade liberaliza­tion; not anymore. Even if forcing friends and allies to the negotiatin­g table actually benefited U.S. trade, it still would not be worth the loss of U.S. soft power.

The [USMCA] deal will probably destroy more U.S. jobs than it creates

Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the Internatio­nal Monetary Fund, is Senior Research Professor of Internatio­nal Economics at the School of Advanced Internatio­nal Studies, Johns Hopkins University, and Senior Fellow at the Center for Internatio­nal Developmen­t, Stanford University. THE DAILY STAR publishes this commentary in collaborat­ion with Project Syndicate © (www.project-syndicate.org).

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