Blog Post - Views on the Economy and the World

After NAFTA

| Oct. 12, 2018

Donald Trump thinks he once again pulled off a smashing victory on October 1, delivering on his oft-repeated campaign promise to terminate NAFTA, “ the worst trade deal ever,“ and replace it with something much newer and better. One is tempted to say to oneself, “Let him think that.” The US-Mexico-Canada Agreement may not be an improvement over the status quo, but at least it is an improvement over the end to free trade in North America which he had threatened.

By now, a Trump modus operandi has come into view. First you threaten to blow up the world, and then everybody is grateful when the eventual outcome turns out to be only modestly worse than where we were.

As Trump sees his genius, he starts the game by playing very rough. In the case of North Korea’s nuclear program, he started by insulting Kim Jong Un and threatening to rain down “fire and fury” on the country. In the case of America’s two biggest customers, he started by insulting Mexicans and Canadians (as “rapists” and “very dishonest,” respectively) and hitting them with tariffs (in violation of US treaty commitments) and threats to end North America’s free trade arrangements. Then, after a year and a half of tough bargaining, the other countries cave in and he emerges with “the single greatest agreement ever.”

That is Trump’s description of his new version of NAFTA. His modus operandi always includes laughably exaggerated characterizations as to what he has accomplished. In the case of the nuclear issue, he claimed after his June 12 photo-op summit with the leader in Sentosa, Singapore, “ that problem has been solved,” even though the North Koreans in fact gave up very little – certainly not their nuclear weapons.

Only a name change?

It is tempting to say that he came out of the Canadian negotiations with the one thing he really wanted, which is a change in name, to USMCA. That allows him to claim victory to his supporters, who may not bother learning the substantive content of the new agreement. It is an instance of “branding,” which was the heart of Trump’s pre-political career in business. (Eswar Prasad points out that the new designation also delivers on the promise of “putting America first” in name, if not in terms of the country’s interests.) But, to be fair, there is a bit more to it than just a name change.

So — assuming approval by the US Congress, which is not a foregone conclusion — what are the major substantive aspects of the revised NAFTA and how should one evaluate them? Needless to say, how you should evaluate them depends on who you are, e.g., whether you are an American dairy farmer and whether you are a mercantilist. Four aspects in particular have garnered attention: autos, milk, disputes, and sunset.

1. Cars

Two measures pertaining to the auto industry are noteworthy. First, the agreement increases the fraction of content that must originate within North America, from 62 ½ % to 75 %, to reduce imports of components from Asia. Second, it requires that at least 40 percent of production come from workers with pay averaging more than $16 an hour, which is well above Mexican wage levels.

There will be some benefits for some American auto workers, at the expense of everybody else. The US auto industry as a whole may well be worse off, in terms of the decreased competitiveness of North American autos on world markets that will result from the disruption of existing efficient supply chains. This is especially true if one factors in the increased cost of steel and aluminum inputs resulting from Trump’s tariffs on those two metals, which remain in effect, let alone if one takes into account foreign retaliation against US auto exports. As for average Americans, they will be worse off, suffering a rise in the cost of living as is usual with protectionism.

2. Milk

Agricultural concessions have also received a lot of attention. Both Canada and the United States have long protected their dairy farmers from the rigors of competition, even more than the rest of their agricultural sectors. Trump placed very high priority on getting Canada to lower its tariff, even though it already imports more American milk than the US imports milk from Canada. The northern neighbor has now agreed to imports of up to 3.6 percent of its dairy market. That is reportedly worth about $70 million. The numbers are very small in the scheme of things (.00003 of total US exports). But still: the market opening is good if you are an American dairy farmer, bad if you are a Canadian dairy farmer. And, in itself, it is good if you believe in free trade.

What if you are an American mercantilist who wants to maximize the US trade balance? Probably no effect. Little noticed is that, in return for some Canadian liberalization in dairy, eggs and poultry, the US agreed to some liberalization in its three most highly protected agricultural areas: “In exchange the United States will provide new access to Canada for dairy, peanuts, processed peanut products, and a limited amount of sugar and sugar containing products.” ( USTR) Another plus for free trade, but now a minus for mercantilists.

Another point that tends to get lost is that Barack Obama had managed to wrest similar dairy concessions from Canada to close the deal on the Trans-Pacific Partnership in 2015. When Trump became president he of course promptly pulled the US out of TP. Overall the TPP – an expansionof NAFTA that truly merited trumpeting — would have been better than this USMCA, even from a narrow mercantilist US viewpoint. Under the TPP, nine additional Pacific Rim countries, including Japan and Vietnam, would have reduced major barriers to US exports.

3. Dispute settlement

Those opposed to recent trade agreements of the last quarter-century have often complained about the dispute settlement mechanisms. There is an important distinction between Investor-State Dispute Settlement (ISDS) mechanisms and other trans-national panels that judge trade issues. Those who fear that corporations have become too powerful in international negotiations object to ISDS mechanisms, because they fear that interests of multi-national corporations will over-ride valid domestic regulations, such as those dealing with health or the environment. The US and Canada have now agreed to drop the ISDS from NAFTA.

The US also agreed to keep NAFTA’s “Chapter 19” procedure for settling other trade disputes. This US concession might seem surprising, in that the Trump negotiators yearned for Americans to be designated as prosecutor, judge and jury in Anti-Dumping and Countervailing Duty cases. But in fact it is unsurprising, in that Canada was never going to give up its position and accept such a one-sided way of settling trade disagreements. A good outcome.

4. Sunset

Most alarming of the proposals from the Trump Administration had been a demand for renewal of NAFTA every five years, with sunset as the default option. This would have crippled the agreement. The perpetual uncertainty over renewal would have seriously impaired the ability of businesses to plan ahead in their trade and investment activities. Canada was never going to give in to this demand either. Fortunately the US side backed down. Unfortunately, it did secure a 16-year sunset provision. Hopefully future periodic reviews will take place at times when more sensible leaders are in charge. Then the automatic sunset can be abolished. Perhaps we can even re-take its rightful place in TPP, after watching other Pacific Rim countries doing business without the US.

There are many other provisions, which will take time to digest. Worker protection is enhanced, rather as it was in TPP. Also reminiscent of TPP, there are provisions for the digital economy and extension of intellectual property in such areas as copyrights and biologics data (giving pharmaceutical companies 10 years of protection) – more wins for US corporations and setbacks for the anti-globalizers.

Bottom line

The overall verdict on the new NAFTA? (Sorry. On the USMCA.) It is a move in the direction of the TPP. It is not as good as TPP. It is not even a net improvement on NAFTA. But it’s better than blowing up North America.

For more information on this publication: Please contact the Belfer Communications Office
For Academic Citation: Frankel, Jeffrey.After NAFTA.” Views on the Economy and the World, October 12, 2018, https://www.belfercenter.org/publication/after-nafta.