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.
The New and Not Improved NAFTA
US President Donald Trump has called the United States-Mexico-Canada Agreement, which succeeds NAFTA, “the single greatest agreement ever signed.” In reality, it is not as good as the Trans-Pacific Partnership, from which Trump withdrew the US upon taking office, nor is it particularly better than the agreement it replaced.
Of course, this is Trump’s modus operandi: threaten to do something catastrophic, so people are relieved when things get only a little bit worse. That is what he did with North Korea, when he insulted its leader, Kim Jong-un, and threatened to rain down “fire and fury” on the country. Compared to nuclear conflict, his eventual meeting with Kim seemed like a triumph, even though it produced little actual progress.
.. Trump’s own mischaracterization of that meeting’s outcome – the problem of a nuclear-armed North Korea, he falsely asserted, had been “solved” – is another standard Trump tactic. He callsthe USMCA “the single greatest agreement ever signed.” For Trump, all NAFTA really needed was a new name – one that, as Eswar Prasad points out, literally puts “America First” – to enable him to pretend for his supporters that he achieved something positive.
..The first change is the introduction of two measures pertaining to the auto industry. The agreement requires that, to avoid tariffs, 75% of an automobile’s content originate within North America
.. This will bring some benefits to some American autoworkers, at the expense of everybody else. Not only will consumers face higher costs for autos; the disruption of existing efficient supply chains may even leave the US auto industry as a whole worse off, as it undermines the international competitiveness of North American output.
..The second prominent change in the USMCA is its agricultural concessions, particularly Canada’s agreement to give US producers access to up to 3.6% of its dairy market.
.. But this concession, the equivalent of 0.00003% of US total exports, will have no discernible impact on the US trade balance. Trump cannot truthfully claim a victory relative to the status quo he inherited – even to his mercantilist supporters. In fact, Trump’s predecessor, Barack Obama, had managed to wrest similar dairy concessions from Canada in 2015 as part of the Trans-Pacific Partnership, from which Trump withdrew the US immediately upon taking office.
.. Overall, the TPP would have been better than the USMCA
.. in the USMCA negotiations, the US agreed to give Canada increased access to its own dairy market, as well as to two of its other most highly protected agricultural areas: peanuts (and processed peanut products) and sugar
.. The third feature of the USMCA that has drawn the most attention relates to dispute-settlement mechanisms.
.. The fourth notable change in the USMCA is the introduction of a sunset clause.
.. the USMCA must be renewed every 16 years. One hopes that future reviews will take place at times when more sensible leaders are in charge, and perhaps will eliminate the automatic sunset clause.
.. Ultimately, the rebranded NAFTA is a step in the direction of the TPP that Trump so reviled. It is not as good as the TPP, nor is it an overall improvement over NAFTA. But it is better than blowing up trade in North America.
Some Things Are True Even if Trump Believes Them
One of the hardest things to accept for all of us who want Donald Trump to be a one-term president is the fact that some things are true even if Donald Trump believes them! And one of those things is that we have a real trade problem with China. Imports of Chinese goods alone equal two-thirds of the global U.S. trade deficit today.
.. he’s so weirdly obsessed with protecting “manly” industries like coal, steel and aluminum that affect our allies more than China — and he’s built such a chaotic policymaking process and unilaterally surrendered so much leverage to Beijing — that he can’t be relied upon to navigate the China trade issue in our national interest.
.. David Autor, the M.I.T. economist who’s done some of the most compelling research on the impacts of China trade
.. the “shock” that China delivered to U.S. lower-tech manufacturers in the years right after Beijing joined the World Trade Organization in 2001
.. roughly 40 percent of the decline in U.S. manufacturing between 2000 and 2007 was due to a surge in imports from China primarily after it joined the W.T.O.
.. it led to the sudden loss of about one million factory jobs in Ohio, Michigan, Wisconsin and Pennsylvania. Trump won all of those states.
.. This “China shock,” said Autor, led not only to mass unemployment but also to social disintegration, less marriage, more opioid abuse and more people dropping out of the labor market and requiring government aid.
.. “International trade creates diffuse benefits and concentrated costs,”
.. has created identifiable losers in trade-impacted industries
.. We assumed that China would “reform and open” after it joined the W.T.O.,
.. Instead, China “reformed and closed.” So China kept a 25 percent tariff on new cars imported from the U.S. (our tariff is 2.5 percent)
.. China grew its companies behind a wall of protection, fed them with state funds and, when they were competitive enough, unleashed them on the world
.. “Chinese and foreign makers are about to start sending huge numbers of fully built cars to the U.S. We are about to see a big increase in the U.S. trade deficit in automotive in the next several years.”
.. U.S. tech firms, like Apple, that want to offer cloud services to Chinese citizens have to store the data in China on servers operated by a Chinese partner. The U.S. has no such regulation.
.. “if they don’t accept demands to partner with Chinese companies and store data in China, then they risk losing access to the lucrative Chinese market, despite fears about trade secret theft and the rights of Chinese customers.”
.. “no US auto company is allowed to own even 50% of their own factory in China, but there are five 100% China-owned EV auto companies in the US.”
.. American electric vehicle (E.V.) companies operating in China are forced to have a Chinese partner and transfer technology to them.
.. they are also playing by a set of rules that others would be naïve to ignore.
.. So what would a smart American president do? First, he’d sign the Trans-Pacific Partnership trade accord. TPP eliminated as many as 18,000 tariffs on U.S. exports
.. focused on protecting what we do best — high-value-added manufacturing and intellectual property.
.. China was not in TPP. It was a coalition built, in part, to pressure Beijing into fairer market access, by our rules. Trump just gave it up for free.
.. “Since you like your trade rules so much, we’re going to copy them for your companies operating in America: 25 percent tariffs on your cars, and your tech companies that open here have to joint venture and share intellectual property with a U.S. partner — and store all their data on U.S. servers.”
.. Having a really tough trade negotiation with China on manufacturing and high technology, but doing it in secret, makes sense to me.
Starting a public trade war with our allies over aluminum and steel that raises the costs for our manufacturers, that doesn’t protect our growth industries and that loses allies that we need to deal with China makes absolutely no sense.
.. We needed to be, and still need to be, much more serious, and generous, about creating “wage insurance” and community reinvestment policies for people and places whose employers are suddenly wiped out by a trade shock.
.. tax incentives, Pell grants, community colleges — to create the conditions for every American to be constantly upgrading skills
.. Too much of the economic discussion of late “has been focused on the 1 percent versus the 99 percent,” observed Autor. “It’s become a kind of ‘inequality porn’
.. You lose sight of the fact that there is a dramatic rise in the economic return to tangibly acquiring skills — skills that are available and should be within everyone’s reach.”
.. The lack of real meritocracy in our country today, he added, “is not about the returns to realized skills. It is about the inequality in the ability to acquire those skills.
.. If you get educated in America today, and have a good work ethic, you are going to be rewarded.’
.. What does education do? It gives you a skill set and enables you to adapt to change better.
And cities and towns anchored by universities tend to reinvent themselves more easily; they’re engines of adaptation.
How and Why to Buy a Car for Cash: Interview with James Kinson from the Cash Car Convert Podcast
.. I had the opportunity to connect with James Kinson, host of the Cash Car Convert podcast.
James has a fun story to share and some great lessons to teach. He’s a long-time car guy who got the debt-free religion and changed his car-buying habits. To his delight, he’s wound up a good deal richer than ever before!
He’s got some great lessons to share and in this show we discuss:
- The impact a cash car can have on your wealth
- Leasing vs. buying
- Whether the advice to buy a good used car still applies in the modern day of higher repair bills.