Trump’s North Amer­i­can trade cha­rade

US Pres­i­dent Don­ald Trump's goals in rene­go­ti­at­ing the North Amer­i­can Free Trade Agree­ment were to re­duce the cur­rent-ac­count deficit and re­store US man­u­fac­tur­ing jobs. But the new United States-Mex­ico-Canada Agree­ment fails on both counts and will re­duce

Financial Nigeria Magazine - - Contents - ANNE O. KRUEGER

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 most dam­ag­ing US 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 an­tidump­ing 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 US 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% of its $16.3 bil­lion dairy mar­ket to more US ex­ports. In ex­change, the US has agreed to im­port more peanuts and sugar from Canada, which im­plies that im­ports from other coun­tries may fall. Mean­while, US tar­iffs on im­ported steel and alu­minium from Mex­ico and Canada re­main in place.

Through­out the process, US ne­go­tia­tors fo­cused mainly on the auto in­dus­try. Among other things, the USMCA will limit the num­ber of ve­hi­cles that can be im­ported into the US, 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 favour­ing 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 neigh­bours un­til they ac­cede to his de­mands – were to re­duce the bi­lat­eral US 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 US 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 US jobs than it cre­ates. The new rules of-ori­gin (ROO) bench­mark re­quir­ing that 75% of an im­ported ve­hi­cle be pro­duced in North Amer­ica (up from 62.5% un­der NAFTA) is likely to re­duce em­ploy­ment by rais­ing the costs of pro­duc­tion. So, too, will the pro­vi­sion re­quir­ing that 40-45% 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% US 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 US mar­ket it­self.

As for for­eign-owned au­tomak­ers op­er­at­ing in the US, 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 US, will fur­ther re­duce over­all US auto pro­duc­tion, and thus auto-sec­tor em­ploy­ment. And even if US 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. US au­tomak­ers gained ac­cess to labour-in­ten­sive parts at lower cost from Mex­ico, and Mex­i­can pro­duc­ers gained ac­cess to less ex­pen­sive cap­i­tal­in­ten­sive parts from the US. 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 US 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 US 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 US had been a global leader in trade lib­er­al­iza­tion; not any­more. Even if forc­ing friends and al­lies to the ne­go­ti­at­ing ta­ble ac­tu­ally ben­e­fited US trade, it still would not be worth the loss of US soft power.

Anne Krueger

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