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

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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: Another Pro-NAFTA Auto Trade Myth Bites the Dust

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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.