The trade agreement needed a retooling, but the Trump administration's bullying is alienating allies. And a new NAFTA faces serious barriers, with big risks if talks collapse.
I have long thought President Donald Trump should rename NAFTA, make a few changes and declare victory.
On the surface, that might be the best outcome of a tentative deal the White House unveiled Monday between the United States and Mexico.
But Trump being Trump, nothing is ever what it seems (e.g. his North Korea “breakthrough”), and the devil would be in the details.
• First, the agreement leaves out the third NAFTA party, Canada. In his Oval Office announcement, Trump threatened our northern neighbor with auto tariffs if it did not “negotiate fairly.”
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Canada is already subject to Trump tariffs on steel and aluminum — and Ottawa struck back with levies on some U.S. goods.
“The Americans are clearly trying to spin this as a deal they’ve reached with Mexico, and Canada can take it or leave it,” Avery Shenfeld, chief economist with CIBC Capital Markets, told Canada’s Financial Post. “Trump was trying to emphasize that he’s prepared to leave Canada out, even though the Mexicans are making it clear that they would prefer a trilateral deal.”
“Prefer” — but Mexico’s foreign minister said his country would move ahead without Canada. And while U.S. Treasury Secretary Steven Mnuchin said Tuesday he hoped the administration could reach a deal with Canada, it would conclude the Mexico deal if necessary.
Canada is America’s largest export destination, valued at $282 billion last year. Mexico was No. 2 at $243 billion.
Washington’s merchandise trade last year totaled nearly $18 billion with Canada, and $2 billion with Mexico in 2017. The two nations are this state’s No. 2 and No 8 export destinations respectively. Both countries are also important destinations for services trade.
The collapse of NAFTA would be a catastrophe for a bloc that accounted for $1.2 trillion in three-way trade last year. With large segments of the economy dependent on the trading bloc, its failure would cost jobs — American jobs.
NAFTA is critical for the supply chains of numerous industries, especially automobiles. Many American companies have extensive investments in Mexico and Canada. One prominent example is the Kansas City Southern Railway, which operates thousands of miles of track in Mexico.
• Second, if Trump concludes a new agreement, it would have to be approved by the legislatures of the nations involved. He and Mexican President Enrique Peña Nieto are in a hurry. A new Mexican president, the populist Andres Manuel Lopez Obrador, takes office in December. Securing the approval of lawmakers so quickly is not a given.
• Finally, the changes to NAFTA are substantial, not cosmetic.
For example, 75 percent of the content for autos must come from North America, up from the 62.5 percent, to qualify for zero tariffs. Steel and aluminum must be exclusively provided from within the bloc. (This would add to the price of cars, although the aim is more American jobs).
Also, between 40 percent and 45 percent of the auto products must come from workers making at least $16 an hour. This would either bring back or keep jobs in the United States, but it could mean raises in Mexico.
Other provisions in the tentative deal would affect labor and the environment, while adding provisions for the digital economy that was in its infancy when NAFTA was created nearly 25 years ago. Some industries get more preferential treatment than others.
The agreement has needed a facelift. Even its proponents agree.
But Trump has always hated NAFTA — calling it “the worst trade deal in history” — and threatened to withdraw the United States.
The argument over NAFTA’s benefits and damage will never end. The soberest assessment is that it mostly rearranged jobs in the United States, which has been a net winner. Many of the job and income losses blamed on NAFTA came from automation, the China Shock and constant pressure to hold down labor costs to please Wall Street.
Automation and so-called shareholder rights would work against any renaissance of well-paid American factory workers now.
The original agreement failed in some of its most soaring ambitions, such as ending undocumented immigration. Mexico is richer now, with a large middle class. But American agricultural imports destabilized Mexico’s traditional farm sector, leaving many farmers there without work.
Whatever the outcome of the latest negotiations, Trump’s bullying is a striking contrast to the 1988 Canada-U.S. free trade agreement. It was negotiated with the bonhomie of President Ronald Reagan and Prime Minister Brian Mulroney at their famous “Shamrock Summits.”
American goodwill and leadership were also on display with NAFTA to include Mexico. This was also Reagan’s optimistic vision, carried forward by President George H.W. Bush and concluded by President Bill Clinton.
Now the ugly American is back, however this agreement turns out. Trump may claim a “win” for the 24-hour news cycle, and his supporters may say that however he got there is fine. The costs to American standing will last much longer.