(What’s Left of) Our Economy: So Far, Trump’s New NAFTA Only Deserves an “Incomplete”

Tags

automotive, China, currency manipulation, dispute resolution, domestic content, exports, globalization, imports, light trucks, NAFTA, non-market economy status, North American Free Trade Agreement, passenger cars, rules of origin, SUVs, Trade, Trump, U.S.-Mexico-Canada Agreement, USMCA, value-added taxes, VATs, {What's Left of) Our Economy

“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.”

(What’s Left of) Our Economy: The Deepening Mystery of Trump’s NAFTA Strategy

Tags

autos, Canada, light trucks, manufacturing, Mexico, NAFTA, Nick Carey, North American Free Trade Agreement, Reuters, ROO, rules of origin, tariffs, Trade, Trump, wages, {What's Left of) Our Economy

The Trump administration’s approach to the North American Free Trade Agreement (NAFTA) keeps getting murkier. And although I agree that keeping the other parties to a negotiation off balance from time to time, and holding cards close to one’s vest, can be excellent tactics, the latest apparent twist in American policy doesn’t appear to be explained by such considerations.

Let’s start with the excellent insight contained in a Reuters article today about one of the centerpieces of NAFTA reform identified by the administration – the rules of origin (ROO) for autos and other light-duty passenger vehicles. These treaty provisions have been rightly targeted by Team Trump negotiators from the standpoint of U.S. interests because motor vehicles and parts comprise such a large percentage of the goods exchanged throughout North America, and because since NAFTA went into effect, contrary to its supporters’ promises, the American automotive sector has become less, not more globally competitive.

The NAFTA ROO are ostensibly aimed at encouraging automotive manufacturing inside North America and currently require that 62.5 percent of a vehicle’s value come from within the free trade zone in order to be exempted from tariffs. The administration’s response is widely described as a toughening of these rules because it would raise this threshold to 75 percent.

But there’s always been one huge catch that I’ve been tweeting about consistently: Unless the tariff penalty imposed on vehicle and parts-makers outside North America is greatly increased, boosting the duty-free content threshold will have little impact on these companies’ production and employment decisions. The reason? The current NAFTA external tariff on these products is only 2.5 percent. (Just FYI, this point was first made during the original NAFTA debate, in this Economic Strategy Institute study to which I contributed modestly.)

(What’s Left of) Our Economy: Flunking the NAFTA Laugh Test

Tags

American Automobile Labeling Act, American Automotive Policy Council, auto parts, autos, Canada, domestic content, GDP, ImpactEcon, Jobs, light trucks, Mexico, Motor & Equipment Manufacturers Association, NAFTA, North American Free Trade Agreement, rules of origin, tariffs, Trade, Trump, {What's Left of) Our Economy

Remember the wonderful David Letterman show feature “Stupid Pet Tricks”? I couldn’t help but think of it while reading various news reports and analyses claiming that the demise of the North American Free Trade Agreement (NAFTA) will bring apocalyptic consequences to three signatory countries: the United States, Canada, and Mexico. But my parents always told me never to use the (needlessly harsh) word “stupid.” So instead, I’ll call them, “Silly NAFTA Studies.” Examining two that have attracted major attention will make clear why.

First, let’s look at findings released in August by a Colorado consulting firm called ImpactEcon, and revised in October, that was mindlessly written up by The New York Times, The Wall Street Journal, CNN.com, The Los Angeles Times, and many other big news organizations. According to this report:

“Overall, the results show that the US’s reversal of NAFTA leads to a decline in real GDP, trade and investment in the US, Canada and Mexico, with most of the losses resulting from Canada and Mexico’s reciprocation. The losses in low skilled employment are most significant, with employment declining by 256,000, 125,000, and 951,000 in the US, Canada and Mexico respectively. Production and specialization of production across the NAFTA region declines, particularly in those sectors with the highest levels of vertical specialization across NAFTA. The motor vehicles and services sectors in all three NAFTA countries decline, along with production of US meat, food, and textiles; Canadian chemicals and metals; and Mexican textiles, wearing apparel, electronics and machinery.”

Sounds awful, right? And especially dumb for President Trump, who won the votes of many American workers without glitzy high tech skills.

But buried here – glossed over in the press accounts – are results that should be screamingly obvious to anyone knowing anything about intra-NAFTA trade balances, the Canadian and Mexican economies, and in particular their heavy dependence on exporting to the United States: Canada and Mexico take much greater growth and employment hits from NAFTA’s termination than does America.

The passage quoted above shows a major gulf between the projected job impacts.  But the differential effects on real growth rates are even greater – and more threatening to Mexico and Canada. (The researchers assume that all three countries return their tariffs to pre-NAFTA levels.)

Real GDP:

U.S.: -0.09 percent

Canada: -0.48 percent

Mexico: -0.88 percent

And keep in mind two other considerations: The Canadian and Mexican economies are much smaller than the U.S.’ So the jobs losses are much more important for them, relatively speaking. Moreover, Mexico is still a developing country with real political stability problems. Growth and employment shocks like this would spell big, and possibly fatal, trouble for its ruling classes.

In fact, the damage to Canada and Mexico is so great that the (closely related) policy conclusions couldn’t be clearer (except to economics reporters). First, America’s NAFTA partners simply can’t afford to retaliate against the United States if the treaty is terminated; and second, as a result, a walk-out by them is wildly improbable unless Washington’s demands are positively draconian.

The second silly study (and related press coverage) comes from the Motor & Equipment Manufacturers Association (MEMA) – the trade association of an industry that has moved massive amounts of production and jobs to Mexico (much of it from the United States), largely to serve the American market, not the Mexican market or third country markets.

So obviously, the group’s findings should be viewed skeptically. Additionally, however, MEMA assumes (along with the ImpactEcon findings and another study – from another offshorers’ organization – the American Automotive Policy Council), that higher NAFTA requirements for origin rules will leave external tariffs low enough to enable auto manufacturers to ignore the standards and keep shipping product with lots of content from outside the hemisphere all around the free trade zone. Worse, without higher enforcement tariffs, the auto industry might also supply American customers to an even greater extent from even lower-cost economies, like those in Asia.

It’s true that the Trump administration hasn’t discussed raising those tariffs to levels that would bite. It’s also true that these moves would violate all three NAFTA countries’ World Trade Organization commitments on bound tariffs, and similar promises they’ve made in their other trade deals. But the folly of preserving that status quo is so clear cut that it’s entirely reasonable to expect a Trump-ian learning curve. And the President does prize his reputation as a disrupter.

Moreover, all he needs to do is look at the situation for sport utility vehicles and other so-called “light trucks.” Since their non-NAFTA U.S. tariff remains at 25 percent, even staunch opponents of a major treaty rewrite conceded that factories will return stateside if this status quo ante comes back. And P.S.: These products are increasingly dominating American passenger vehicle markets.

A second substantive reason for discounting this study concerns the auto parts makers’ claim that “Raising the automotive content thresholds and forcing automakers to verify the North American origin of more electronics and other parts now sourced from Asia would cause some parts manufacturers to forego NAFTA benefits.”

As just mentioned, the second fear is warranted if tariffs for the origin rules stay where they are. But the point about forcing the companies to verify where their inputs come from? Vehicle makers have already required to provide exactly this information for NAFTA’s entire life by the American Automobile Labeling Act. And they clearly view NAFTA as a huge success. Many companies in the parts supply chain are much smaller, and detailed reporting could indeed become an unreasonable burden for them. But many parts makers are plenty big enough to assume this responsibility easily (unless they don’t know where they themselves manufacture?). Much more important: The information would greatly aid policymakers and the public in (finally!) evaluating the impact of trade agreements and related policy decisions with a critical mass of precision.

(What’s Left of) Our Economy: Another Pro-NAFTA Auto Trade Myth Bites the Dust

Tags

automotive, domestic content, light trucks, Mexico, NAFTA, North American Free Trade Agreement, offshoring, passenger cars, rules of origin, sport-utility vehicles, SUVs, The Wall Street Journal, Trade, Trump, WardsAuto.com, {What's Left of) Our Economy

Ever since presidential candidate Donald Trump began slamming big U.S.- and foreign-owned automakers for moving production and jobs from America to Mexico due to the incentives created by the North American Free Trade Agreement (NAFTA), his critics have portrayed these attacks as a quintessential example of his ignorance about the automotive industry. How interesting, then, to report that brand new industry figures go far toward explaining why the new president’s concerns have been justified all along.

Mr. Trump, they insisted, either didn’t know or didn’t want to know that this offshoring – typified by this Ford announcement last September – stemmed not mainly from NAFTA’s terms but from the simple economics of different segments of the auto market. Even better, American domestic auto production was sure to benefit and indeed was already benefiting.

Why? Because nearly all of the auto capacity and employment moving to Mexico had to do with passenger cars, whose relatively small size and sluggish sales (due to low-ish oil prices) reduced their margins and made them uneconomical to manufacture in the United States with its high labor costs. So the automakers had wisely decided that their future production should be in much lower cost Mexico. Yet those moves would leave plenty of work for the companies’ remaining U.S. factories and employees, which would focus ever more tightly on more appealing and therefore higher margin sport-utility vehicles (SUVs) and light trucks.

To be sure, such claims had already been powerfully undercut by data showing that within North America, Mexico’s overall share of vehicle production had long been rising at the expense of the United States’. And the period of time examined includes SUV/light trucks boom years. But new statistics indicate that the SUV claims themselves are increasingly bogus as well.

Specifically, The Wall Street Journal has just presented data from the authoritative WardsAuto.com revealing not only that Mexico’s share of the NAFTA zone’s total light vehicle output (passenger cars, SUVs, and light trucks combined) just topped 20 percent for the first time. According to the Journal account, this milestone was reached largely because “the amount of popular pickups and SUVs made south of the border sharply increased.”

In addition, the Journal article indicates that these trends will only continue. For although Fiat Chrysler and Volkswagen in particular “are boosting jobs and investments at American plants amid a focus on building more trucks…those plans are unlikely to lighten the companies’ dependence on Mexican factories for U.S. sales.”

None of this should be the slightest bit surprising. Claims that Mexico was mainly being used by automakers to manufacture passenger cars of course are consistent with the notion spread for years by globalization cheerleaders that production and jobs offshored to developing countries were mainly the low end of various industries, and would permit higher paid and more productive workers in the United States to concentrate on where their efforts more properly belonged – the much more higher value and promising “good stuff.”

But this contention never made any sense. If workers in Mexico – or China or India or Brazil – could be trained to produce small cars etc efficiently, why on earth would larger vehicles remain beyond their reach – at least for very long?

So President Trump’s plans to revamp NAFTA to eliminate its offshoring bias make perfect sense from the standpoint of the domestic U.S. economy. Further, proposals being considered to ensure that all products sold in North America without tariffs be overwhelmingly North American made make just as much sense for all three signatories – since they would boost production and employment throughout the free trade zone. And these measures would even be good ultimately for the vehicle-makers themselves – unless they think that using Americans as customers in their business models but not nearly so much as workers will make any sense for much longer.