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 US employment and weaken American producers’ position in international markets.

.. Meanwhile, US tariffs on imported steel and aluminum from Mexico and Canada remain in place.
.. 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 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 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.
.. 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.
.. 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 labor-intensive parts at lower cost from Mexico, and Mexican producers gained access to less expensive capital-intensive 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 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.

.. other governments will now have to ask themselves why they should negotiate with a country that tears up settled agreements at will.

.. 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.

 

Trump’s Trade Disaster

In the second year of his presidency, Donald Trump has doubled down on his “America First” brand of economic nationalism, by making impossible demands of US allies and escalating a multi-front trade war of his own making. In doing so, however, he has all but guaranteed that Americans themselves will bear the costs.

President Donald Trump may fancy himself a builder, but when it comes to international treaties and norms, he has proved to be a one-man wrecking crew. And now, the chaos appears to be spreading and deepening.

.. THE TRUTH ABOUT NAFTA

For decades after World War II, Mexico pursued many of the same disastrous economic policies as other developing countries. It maintained high protectionist barriers for manufactured goods, and relied heavily on commodity exports, particularly oil. As a result, it experienced recurrent stop-go cycles, whereby accelerating inflation and ballooning balance-of-payments deficits would force a round of austerity, only for the process to repeat itself after increases in commodity prices, but at a slower rate of growth each time. Not surprisingly, the growth rate during these years waxed and waned dramatically, and by the start of 1989, Mexico’s per capita income was around $2,393 – about 11% that of the US.

.. at the time, the average US tariff on manufactured imports was around 2%, while Mexico’s average tariff on US exports was around 10%. It was clear from the start that the US would gain more from improved access to the Mexican market than vice versa.

.. Ross Perot famously warned that an FTA with Mexico would result in “a giant sucking sound going south.” Of course, nothing of the sort happened.

NAFTA entered into force on January 1, 1994, and between 1993 and 2000, US unemployment fell from 6.9% to 4%. Today, it stands at 3.8% – its lowest point in almost two decades.

.. Some of the demands directed at Mexico, in particular, are so outrageous that no country could ever accept them. Others, such as the US proposal for more stringent rules of origin (which require that a certain percentage of an imported article be fabricated within the NAFTA trade bloc), are very problematic, but a compromise can probably be reached.

.. One of the US’s most disruptive tactics has been to demand that Mexico bring its auto workers’ pay up to the level of their US counterparts. The minimum wage in Mexico is currently around $4 per day, and around $6 per day in manufacturing industries. But the wage floor US negotiators have reportedly demanded is $16 per hour – 21 times the average wage in Mexican manufacturing.

..  it is inconceivable that the Mexican electorate would stand for one segment of workers earning $128 per day while everyone else still earned an average of $4-6 per day.

.. the Trump administration’s demand is so absurd that even the US auto industry opposes it , not least for what it would do to US producers’ value chain.

.. Another impossible US demand, which would affect Canada as much as Mexico, is a sunset clause that would force each government to renew the renegotiated NAFTA every five years. The fact that the entire deal could potentially expire every five years would create a permanent state of uncertainty

.. The Trump administration has justified the tariffs on national-security grounds, which makes absolutely no sense when one considers that US allies are bearing the brunt of the costs.

.. The Trump administration’s approach to both allies and adversaries represents the worst kind of “managed trade,” which the US and other countries with market-based economies have long condemned.

South Korea did not achieve strong, sustained growth until it liberalized its trade and other economic policies, starting around 1960, with the encouragement of the US.

.. South Korea must now create an administrative apparatus to limit its steel producers’ exports to the US. That means tracking 52 different categories of steel to ensure that exports remain at or below 70% of their 2014-2017 levels.

.. there is a need to monitor and regulate the inflow of steel and aluminum, whether by the US, South Korea, or both. For the US, expanding its own customs service to perform this task would carry enormous administrative costs

.. the new dispensation will likely lead to all manner of influence peddling as firms try to win scarce licenses from customs officials

.. There are around 80,000 jobs in the US steel industry, more than 900,000 jobs in the US auto industry, and millions more in other industries that use steel or aluminum.

.. by protecting domestic producers, the Trump administration is raising steel and aluminum prices within the US, while reducing them in the rest of the world. In essence, Trump is conceding even more cost advantages to non-US producers, for no good reason.

.. After World War II, the US led the way in establishing a rules-based trading system, first with the General Agreement on Trade and Tariffs, and then with its successor, the World Trade Organization. The past 73 years have shown that when there are legitimate grievances between trading partners on issues such as high-tech secrets, bilateral efforts to resolve them often prove ineffective, whereas action taken through the WTO has a strong track record. Unless and until the Trump administration recognizes this fact, Americans themselves will bear the costs of its disastrous trade policies.