“What was all the fuss about?” is a question that supporters and especially critics of conventional, pre-Trump trade policies are entitled to ask after reading the text of the new “U.S.-Mexico-Canada Agreement” – the brand new revamp of the North American Free Trade Agreement (NAFTA) just agreed to by the three signatories.
Although President Trump has repeatedly called NAFTA “the worst trade deal ever,” the new pact seems to retain the previous deal’s fatal flaw. Interestingly, though, the very modesty of “USMCA’s” departures from NAFTA means that, because U.S. trade is so worldwide in scope, the best chance for Mr. Trump to keep his campaign promises to turn U.S. trade policy into an engine of domestic growth and employment rather than of offshoring depends on two additional steps. The first is following through with his threat to impose stiff tariffs on automotive imports from the rest of the world. The second is expanding his already substantial tariffs on imports from China.
As I’ve explained repeatedly, that fatal NAFTA flaw entailed the treaty’s failure to provide significant incentives to producers outside the free trade zone to supply U.S., Canadian, and Mexican customers with goods – mainly in the automotive sector – produced in the United States, Canada, and Mexico, not in Europe, Asia, or elsewhere.
USMCA does create stricter “rules of origin” governing trade in vehicles and parts – by phasing in increases in the share of inputs provided from inside North America that vehicles and parts will need to contain in order to qualify for tariff-free treatment when traded among the three countries. The new treaty also mandates that a certain percentage of these products be made in factories paying workers wages much higher than prevail in Mexico currently. But the penalties non-North American producers face for ignoring these requirements, at least for duty-free treatment in the U.S. market, by far North America’s largest, are exactly the same sorely inadequate tariffs imposed by NAFTA – 2.5 percent for passenger cars and nearly all parts, and 25 percent for sport-utility vehicles (SUVs) and light trucks.
In other words, non-North American companies and entities (such as are found in China) will find it just about as easy to absorb or evade the costs of exporting to rather than investing in North America – through increased subsidies, currency devaluation, or accepting slightly lower profits – as they have for NAFTA’s entire 24-year history.
Automotive-wise, as previously reported in the news media, USMCA does differ from NAFTA in one seemingly important respect: The Trump administration won the right to increase greatly tariffs on passenger cars, SUVs, and light trucks from Mexico if these shipments to the United States exceed certain levels (1.6 million vehicles) and on auto parts if these shipments exceed $108 billion per year. Interestingly, no such limits are imposed on automotive imports from Canada.
The catch is that these thresholds significantly exceed current American import levels, so they’ll provide no noteworthy relief for U.S. autoworkers and domestic production facilities for the time being.
The good news for these beleaguered American workers and companies is that major incentives to move non-North American production to the continent can still emerge. But their fate will turn on whether President Trump imposes stiff tariffs on automotive products from outside North America under Section 232 of U.S. trade law, and whether he keeps curbing American trade with China.
Canada and Mexico have won major exemptions in the USMCA from these threatened levies (see here and here for the relevant side letters), but such new barriers to imports from Germany, Japan, South Korea, China, and others should create plenty of new work and sales opportunities for facilities in all three USMCA countries.
Section 232 auto tariffs alone wouldn’t achieve my own favored goal of turning all of North America and its economy into a genuine trade bloc, which would require non-continental industries across the board to supply North America from North America. In one fell swoop, this approach would solve nearly all of America’s longstanding trade problems with all of the aforementioned non-North American countries along with a host of others. But given the prominence of automotive products in the North American trade and broader economic landscape, it would be an important first step. And more China-specific levies would help as well, given the huge and rapidly growing shares of U.S. manufacturing markets grabbed by the People’s Republic in the last 25 years.
To be sure, other features of USMCA look worrisome to me. Principally, the deal does nothing to eliminate the problems caused by the Canadian and Mexican use of value-added taxes (VATs) and America’s lack thereof. These levies serve as hidden barriers to the Canadian and Mexican markets, and hidden subsidies for exports from Canada and Mexico to the United States.
The Trump administration also has granted Canada’s demand to preserve the old NAFTA’s dispute-resolution process, which greatly helps Canada and also Mexico to frustrate U.S. efforts to curb dumped and illegally subsidized imports from those countries.
On the plus side, the agreement contains enforceable prohibitions against currency manipulation – a first for an American trade deal. And the administration won for the United States the right to withdraw from the trilateral USMCA and substitute a bilateral deal if one of the parties signs a separate trade agreement with a “non-market economy.” Since that clearly means, “China,” it’s one more barrier to non-North American economies enjoying some of the benefits of the free trade agreement without incurring any of the obligations.
But the origin rules have always been central to the promise of integrating the three North American economies for truly mutual benefit. And since the auto tariff decision has now become the development that can make or break the effectiveness of these rules, the only grade merited so far by President Trump’s NAFTA rewrite is “incomplete.”