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That was some footnote Commissioner Jason E. Kearns apparently insisted be inserted into the U.S. International Trade Commission’s (USITC) recent report on the economic impact of the Trump administration’s attempt to rewrite the North American Free Trade Agreement (NAFTA). In fact, it contains the key to giving this Congressionally mandated study of the U.S.-Mexico-Canada Agreement (USMCA) a passing or failing grade. And a special bonus – it indicates why all three countries should have followed my advice and turned North America into a genuine trade bloc.

The particular Kearns-related footnote I’m talking about (number 66, on p. 57) dealt with the USITC’s analysis of one of the most controversial (and in my view, most promising) provisions of the new framework for North American trade – which has been signed by the continent’s three governments but not yet ratified by any of their legislatures. It’s the agreement’s attempts to restructure automotive industry trade among the signatories. These proposed new arrangements matter greatly because trade in vehicles and parts represents such a big share of overall North American trade (more than 20 percent of America’s total goods trade with Canada and Mexico, according to this study).

In brief, at the Trump administration’s instigation, USMCA increases the share of a vehicle’s content that needs to be made somewhere inside the free trade zone in order to qualify for tariff-free treatment, and includes other measures aimed at curbing and even reversing the movement of U.S.-owned auto production and the related jobs from the United States to much lower wage and overall lower cost Mexico, along with the resulting flows of Mexican-assembled vehicles and parts into the American market.

The USITC concluded that although the new NAFTA would produce slight benefits for the American economy overall, including for domestic U.S. manufacturing, the new content measures (called “rules of origin,” or “ROO” for short) themselves would drag on overall economic performance. In fact, they would even slightly depress U.S. vehicle production, not increase it.

As always the case with such projections, these conclusions are based on numerous assumptions, and as almost always the case, at least some of these assumptions can be pretty dodgy. Two that I have special problems with: First, when it comes to auto parts, the USTIC only examines only trade and investment in engines and transmissions; and second, the Commission doesn’t take into the jobs multiplier of vehicle and parts manufacturing.

These assumptions surely skew the conclusions to the downside because, as important as engines and transmissions are, the report itself acknowledges that other parts nowadays represent about 37 percent of total domestic parts output; and because the auto industry’s multiplier effect is really high. Indeed, according to a 2015 report by the Center for Automotive Research, for each American job created in domestic auto or light truck manufacturing, seven other jobs are created in the rest of the economy. That finding is significant because the Center has claimed that the new origin rules would exact exorbitant costs, and because it gets significant funding from an auto industry that has expressed major reservations about them.

But much more fundamental issues are raised by that footnote 66, especially considering these questionable assumptions. Here it is in full:

Commissioner Kearns notes that, as described above, the model appears to suggest that the trade restrictiveness of a ROO is inversely related to its positive impact on the U.S. economy. Carried to its logical conclusion, this would appear to suggest that the best ROO is a very weak or nonexistent ROO. In turn, this would result in other countries, which do not incur any obligations to import U.S. products, obtaining unilateral, duty-free access to the U.S. market. If, on the other hand, we were to compute an ROO that optimizes regional content while recognizing that there may be slack in the economy, we may estimate a gain to the overall economy from the automotive ROO.”

Kearns first observation not only makes perfect sense. It’s the only sensible macro-conclusion that can be drawn about rules of origin. Because their complete absence (the counter-factual the Commission seems to have ignored) would indeed permit non-North American producers to reap all the gains generated by the USMCA (mainly, unfettered access to the immense continental market) without incurring any of the obligations. That’s supposed to result in a net plus for the American economy, the predominant market prize in North America?

The second observation is even more interesting. It notes that much more stringent rules (those that would “optimize regional content”) could be expected to leave the overall economy better off than the current rules. And as I’ve observed, the low tariff penalties (2.5 percent) imposed on non-North American auto producers for ignoring the origin rules are guaranteed to minimize the gains they produce. Therefore, much higher tariff penalties – which would approximate those commonly associated with trade blocs aimed at minimizing imports – would come closest to maximizing that what the USITC calls “the gain to the economy from the automotive ROO.”

President Trump claims that an “America First” approach to trade policy distinguishes him sharply from his predecessors. Footnote 66 in the USTIC report makes as possible that a genuine “North America First” strategy would have best advanced that goal – and that in this case, anyway, there was no reward for timidity.

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