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.
White House to Impose Metal Tariffs on E.U., Canada and Mexico
By keeping trading partners guessing, the president has sought to create leverage in trade negotiations, including in talks over the North American Free Trade Agreement with Mexico and Canada. But in the process, he has sowed an atmosphere of chaos among allies as well as manufacturers uncertain about the ultimate impact on their vast supply chains.
.. Prime Minister Justin Trudeau of Canada said it was “inconceivable” that Canada “could be considered a national security threat.”
.. “For the first time in generations, we’ve really thrown out the rule book with our best trading partners,” said Rufus Yerxa, the president of the National Foreign Trade Council, which represents some of the largest exporters in the United States. “We can’t expect them to continue business as usual with us if we are throwing out the rules. So that means everything from airplanes to agriculture is on the chopping block.”
.. But Vice President Mike Pence on Tuesday phoned to tell the Canadian prime minister that the precondition of a deal was a sunset clause, meaning the pact would automatically expire unless the three countries voted to continue it. The idea has drawn ire from both foreign leaders and business executives, who say it undercuts the surety that trade agreements are meant to create.“I had to highlight that there was no possibility of any Canadian prime minister signing a Nafta deal that included a five-year sunset clause,” said Mr. Trudeau, “and obviously the visit didn’t happen.”.. Germany, in particular, had pressed for a negotiated solution, but officials there grew wary after Mr. Trump announced that he would begin a separate trade investigation into automotive imports. If car tariffs go into effect, they would especially hurt Germany’s economy... The Trump administration has argued that imports have weakened the country’s industrial base, and, by extension, its ability to produce tanks, weapons and armored vehicles. “We take the view that without a strong economy, you can’t have strong national security,” the commerce secretary, Wilbur Ross, said Thursday... The European Union and Canada have objected strongly to the idea that they pose any kind of threat to national security, citing their close alliances and defense agreements with the United States... Canada announced corresponding tariffs on a broad list of American exports, including steel and aluminum, as well as dozens of basic consumer products like ketchup, insecticides and laundry machines. The Canadian tariffs, which go into effect July 1,.. The United Steelworkers union, which represents members in Canada as well as the United States, said the decision called “into serious question” the design and direction of the administration’s trade strategy... The Aluminum Association, the industry trade group, also said it was disappointed. Heidi Brock, the group’s president, said the tariffs would do little to address the larger issue of overcapacity in China “while potentially alienating allies and disrupting supply chains that more than 97 percent of U.S. aluminum industry jobs rely upon.”
.. “These tariffs are hitting the wrong target,” said Representative Kevin Brady, Republican of Texas. “When it comes to unfairly traded steel and aluminum, Mexico, Canada and Europe are not the problem — China is.”
.. In a more pointed statement, Senator Ben Sasse, Republican of Nebraska, called the tariffs “dumb.”
“Europe, Canada and Mexico are not China, and you don’t treat allies the same way you treat opponents,” he said.
Canada Growth at Risk Due to Heightened Trade Anxiety: IMF
Trump administration’s trade, tax policies could weigh on Canada ‘for an extended period’
in the event Nafta was terminated—as Mr. Trump has threatened to do—and there is a reversion to tariff rates under World Trade Organization rules, Canadian economic output could be reduced by 0.4% over the next four to five years, and “by even more if nontariff trade costs increase.”
.. deep U.S. cuts to corporate tax rates pose another “considerable uncertainty” on the Canadian economy, warning the combination of lower U.S. taxes and trade uncertainty could make Canada a less attractive destination for investment.
.. trade uncertainty is prompting some Canadian firms to delay decisions on business investment, while other companies are opting to hedge bets and expand outside of Canada. “We expect business investment to increase, but not by as much as it could without this uncertainty,”
Trump Threatens Nafta, Honduras Aid Over Migrant ‘Caravan’
In tweets, the president brings trade deal into play over annual protest that has caught his attention
President Donald Trump on Tuesday warned that the North American Free Trade Agreement was “in play” and threatened to end aid to Honduras and other Central American countries if an organized protest march of 1,000 asylum seekers traveling through Mexico reaches the U.S. border.
.. “Cash cow NAFTA is in play, as is foreign aid to Honduras and the countries that allow this to happen. Congress MUST ACT NOW!”
.. The “caravan of people” Mr. Trump attacked Tuesday is an annual event that leaders say aims to raise awareness about the tens of thousands of Central Americans who, facing gang violence and political unrest in one of the world’s most violent areas, flee every year to Mexico or the U.S. Many are turned back, extorted or kidnapped along the way.
.. Mexican Foreign Minister Luis Videgaray responded to Mr. Trump’s comment Sunday with a tweet of his own denying that his government was doing nothing to control migration. “Every day Mexico and the U.S. work together on migration throughout the region. Facts clearly reflect this,” he said. “Upholding human dignity and rights is not at odds with the rule of law.”
.. Mexican and U.S. officials, facing national elections this year, have pressed for a relatively quick deal on Nafta, while their Canadian counterparts have held out for an agreement that would preserve key structures from the existing Nafta, including a dispute-settlement system that can challenge tariffs levied by the Trump administration.
.. Mr. Trump’s threat to cut aid to Honduras is one of a series of such warnings he has issued in the first 14 months of his administration, on which he hasn’t always followed through.
The U.S. plans to send $65.8 million in aid to Honduras in fiscal year 2019, according to the State Department, though none of those funds have yet been obligated or spent.