President Trump’s announcement Monday that he was replacing the North American Free Trade Agreement with a deal just with Mexico was, like so much of what comes out of the White House, as much posturing as policy.
For starters, there is no deal with Mexico, at least not yet. There’s a “preliminary agreement in principle” by the two sides to update certain provisions of NAFTA, but Mexican officials said multiple times Monday that they have a non-trivial precondition: Canada must be on board too.
Trump and other administration officials didn’t acknowledge as much Monday. Instead, Trump threatened to slap tariffs on more Canadian goods if our neighbor to the north didn’t accede to terms in short order.
Second, if Canada does join in, the deal would look a lot like the old NAFTA regardless of what it’s called. The changes agreed to by Mexico resemble what the Obama administration was pursuing through the Trans-Pacific Partnership — a trade deal with 11 mostly Asian countries that Trump abandoned — just with fewer partners.
These include such steps as improving the stringency and enforceability of NAFTA’s labor standards (the original version didn’t have any — they were covered by a side deal); improving protections for copyright, patent and trademark holders; and setting standards for the treatment of content and services delivered online.
Such updates are overdue, although it’s difficult to judge the actual terms of the new deal because few details have been released.
Third, some of the provisions that have been outlined could do more harm than good to U.S. interests. A key focus for Trump has been increasing incentives in the trade pact for automakers to buy components for and build their vehicles in the United States. To that end, the deal would require that, in order to avoid tariffs, 75% of each vehicle must be produced in the U.S. or Mexico, and that 40% to 45% of the components must be manufactured by workers making at least $16 an hour.
But Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, warned last week that such changes would actually hurt automakers throughout the region. “If the proposed NAFTA content rules force North American automakers to switch to higher priced local suppliers, and the added cost is more than the current import tariff, NAFTA will actually benefit importers by giving them a price advantage over North American production,” Schott wrote.
Of course, the administration is considering a huge increase in tariffs on cars imported from outside the region, which could offset the increase in costs for those made in North America. But in that case, the burden would fall on car buyers in the U.S., who would see their prices rise sharply. More important, using tariffs to win trade concessions hasn’t been a winning strategy in the past, and it’s even less likely to be sustainable now that the United States isn’t as economically dominant as it used to be. There are far more buyers around the world capable of taking Americans’ place today than there were 30 years ago.
U.S. automakers, like many other manufacturers, adapted to the rise in competition from around the world by switching to global supply chains and, at times, shifting production outside the country. To the Trump administration, that’s a uniformly bad thing; any product not made in the U.S. represents a loss of U.S. jobs. But that ignores the other U.S. jobs created by the shift in production — for example, in logistics and product design — as well as the savings for consumers.
There are a few provisions in the deal with Mexico that Canadian negotiators have previously rejected, spelling trouble for the talks to come. One example: The tentative agreement would drop a provision that makes it easier for a NAFTA country to challenge trade barriers imposed by another NAFTA country. This proposal seems designed to let the Trump administration continue to try to bully its trading partners with unilateral tariffs, such as the ones on steel and aluminum imposed in the name of national security.