(What’s Left of) Our Economy: How to Really Make Trade Fair

Tags

automotive, BBB, Biden administration, bubbles, Build Back Better, Canada, consumption, Donald Trump, electric vehicles, EVs, fossil fuels, manufacturing, Mexico, NAFTA, North America, production, tax breaks, Trade, U.S.-Mexico-Canada Agreement, USMCA, {What's Left of) Our Economy

There’s no doubt that the next few weeks will see a spate of (low-profile) news articles on how unhappy Canada and Mexico are about proposed new U.S. tax credits for purchasing electric vehicles (EVs) and how these measures could trigger a major new international trade dispute.

There’s also no doubt that any such disputes could be quickly resolved, and legitimate U.S. interests safeguarded, if only Washington would finally start basing U.S. trade policy on economic fundamentals and facts on the ground rather than on the abstract and downright childishly rigid notions of fairness that excessively influenced the approach taken by Donald Trump’s presidency.

The Canadian and Mexican complaints concern a provision in the Biden administration’s Build Back Better (BBB) bill that’s been passed by the House of Representatives but is stuck so far in the Senate. In order to encourage more EV sales, and help speed a transition away from fossil fuel use for climate change reasons, the latest version of BBB would award a refundable tax break of up to $12,500 for most purchases of these vehicles.

The idea is controversial because the administration and other BBB supporters see these rebates as a great opportunity to promote EV production and jobs in the United State by reserving his subsidy for vehicles Made in America. (As you’ll see here, the actual proposed rules get more complicated still – and could change some more.) And according to Canada and Mexico, this arrangement also violates the terms of the U.S.-Mexico-Canada-Agreement (USMCA) governing North American trade that replaced the old NAFTA during the Trump years in July, 2020.

Because USMCA largely reflects those prevailing concepts of global economic equity, Canada and Mexico probably have a strong case. But that’s only because this framework continues classifying all countries signing a trade agreement as economic equals. Even worse, there’s no better illustration of this position’s absurdity is the economy of North America.

After all, the United States has always accounted for vast majority of the continent’s total economic output and therefore market for traded goods. According for the latest (2020) World Bank figures, the the United States turned out 87.51 percent of North America’s gross product adjusted for inflation. And when it comes to new car and light truck sales, the U.S. share was 84.24 percent in 2019 (the last full pre-pandemic year, measured by units, and as calculated from here, here, and here).

But in 2019, the United States produced only 68.88 percent of all light vehicles made in North America (also measured by units and calculated from here, here, and here.) Moreover, more than 70 percent of all vehicles manufactured in Mexico were exported to the United States according to the latest U.S. government figures. And for Canada, the most recent data pegs this share at just under 54 percent (based on and calculated from here and here).

What this means is that, without the American market, there probably wouldn’t even be any Canadian and Mexican auto industries at all. They simply wouldn’t have enough customers to reach and maintain the production scale needed to make any economic sense.

So real fairness, stemming from the nature of the North American economy and the North American motor vehicle industry, leads to an obvious solution: Give vehicles from Canada and Mexico shares of the EV tax credits that match their shares of the continent’s light vehicle sales – just under 16 percent.

Therefore, using, say, 2019 as a baseline, from now on, the first just-under-16 percent of their combined light vehicle exports to the United States would be eligible for the credits for each successive year, and the rest would need to be offered at each manufacturer’s full price (a pretty plastic notion in the auto industry, I know, but a decision that would need to be left to whatever the manufacturers choose).

Nothing in this decision would force Canada or Mexico to subject themselves to these requirements; they would remain, as they always have been, completely free to try to sell as many EVs as they could to other markets (including each other’s).

What would change dramatically, though, is a situation that’s needlessly harmed the productive heart of the U.S. economy for far too long, resulting from trade agreements that lock America into an outsized consuming and importing role, but an undersized production and exporting role. In other words, what would change dramatically is a strategy bearing heavy responsibility for addicting the nation to bubble-ized growth. And forgive me for not being impressed by whatever legalistic arguments Mexico, Canada, any other country, or the global economics and trade policy establishments, are sure to raise in objection.

(What’s Left of) Our Economy: Good News About Manufacturing Reshoring to the U.S.

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(What's Left of) Our Economy, automotive, Canada, China, domestic content, Foley & Lardner, manufacturing, Mexico, quotas, reshoring, rules of origin, tariffs, Trade, trade war, Trump, U.S.-Mexico-Canada Agreement, USMCA

President Trump’s critics have often complained that even if his trade war with and tariffs on China have prompted many U.S.-owned and other companies to move production out of the People’s Republic, relatively few are relocating back to the United States. (See, e.g., here.) So it was especially interesting to come across a survey of mainly America-headquartered firms indicating that the Trump policies actually deserve pretty high marks for benefiting domestic industry.

The study was conducted by the legal and business advisory firm Foley & Lardner, and involved 143 executives (presumably from 143 companies). Fully 78 percent were “primarily based in the U.S.” and most of the rest were from Mexico. And their businesses ranged throughout the manufacturing sector, with the two biggest industries represented being automotive and general manufacturing (22 percent each). These companies’ sizes and places in global supply chains varied significantly, too.

When it comes to China production and sourcing strategies, Foley found that 21 percent of these respondents “have already” moved “some” of their facilities out of the People’s Republic, 22 percent were “currently in the process of doing so,” and 16 percent are “considering” this option. Of the remaining 39 percent of respondents, 16 percent have rejected leaving China, and 23 percent say they haven’t considered such a move to date.

These numbers roughly correspond with the results of other, similar surveys and reports. (E.g., this one.) But the real eye opener came from answers to the question “To what other countries are you moving, or considering moving, production or sourcing of goods and/or services?” Of the companies that said they’re moving production or sourcing from China, 74 percent mentioned the United States. The next most popular option was Mexico (47 percent), followed by Canada (24 percent), and Vietnam (12 percent).

These percentages (and others) add up to more than 100 because, as the question implied, firms can be leaving China for more than one country, in order to hedge their bets against dangers like tariffs, pandemics, and the like. But they make clear that the United States has been prominently in the mix, and so has the Western Hemisphere – which helps U.S.-based manufacturing because goods made in Mexico and Canada tend to have relatively high levels of American-made parts and components and other industrial inputs.

To be sure, there’s some evidence that these levels have been falling in recent years. But there’s also reason to expect that the Trump administration’s U.S.-Mexico-Canada Agreement (USMCA – its rewrite of the North American Free Trade Agreement), will reverse these trends at least in part because its provisions require that goods receiving tariff-free treatment in the tri-national trade zone contain higher levels of North American content overall, and because of quotas on U.S. automotive imports from Mexico (which haven’t kicked in yet but which seem likely to in the not-too-distant future).

I’d be the last one to claim that the Foley report settles the argument over how effective the Trump trade policies have been in encouraging manufacturing reshoring. But when all the hard data showing U.S. domestic manufacturing’s resilience both during the current pandemic (in terms of both jobs and output), and during a disruptive event like a trade war, are considered, the Foley findings look anything but fanciful.

(What’s Left of) Our Economy: Strong Internals for America’s 2019 Trade Performance

Tags

Advanced Technology Products, aircraft, Boeing, China, manufacturing, merchandise trade deficit, North America, Pacific Rim, tariffs, Trade, trade deficit, Trump, U.S.-Mexico-Canada Agreement, USMCA, {What's Left of) Our Economy

Because last week’s official U.S. trade figures came out right after President Trump’s acquittal in the Senate impeachment trial and the confusing Iowa Democratic presidential caucuses, I didn’t get the chance to issue more than a limited analysis focusing on some very encouraging highlights for backers of administration trade policy. But the newsworthy results from the release – which covered December and therefore full-year 2019 – by no means stopped there.

For example, the biggest annual drop on record in the still-massive U.S. goods trade deficit with China was accompanied by the shrinking of the value of total merchandise trade between the two economies by more than 18 percent – to its lowest level ($558.87 billion) since 2012 ($536.14 billion). Moreover, since the U.S. economy has grown significantly over the last seven years, this sign of decoupling looks all the more impressive.

Also crucial – although that merchandise trade deficit remains way too big, the portion most heavily influenced by trade policy barely grew (and grew much slower than the overall economy). And even better, the overall merchandise trade deficit became more concentrated within North America. That’s could be a big positive for two reasons. 

First, even before the new U.S.-Mexico-Canada Agreement (USMCA)came into force, with its modest spurs to regional production and sourcing, American imports from its two neighbors contained relatively high levels of U.S. content. That means that domestic industries and their employees had a relatively big share of their production – along with the associated revenues, jobs, and wages. (At the same time, there’s now considerable disagreement over how these Canada and Mexico content levels compare with goods imported from elsewhere.  See, e.g., here and here.)

Less controversy surrounds the second argument for North American-izing U.S. trade:  America’s fortunes are much more directly affected by the well-being of its immediate neighbors than by conditions elsewhere.

And the new trade report shows that North American-ization advanced rapidly last year. Specifically, between 2018 and 2019, China’s share of this trade gap sank from 47.96 percent to 41.84 percent and that of Pacific Rim countries (an official U.S. government grouping that excludes the Western Hemisphere) from 58.26 percent to 53.37 percent. But North America’s share jumped from 11.40 percent t 15.10 percent.

Moreover, the Chinese share was the lowest since 2011 (40.70 percent), the Pacific Rim’s since 2012 (52.44 percent) and North America’s the highest of the current economic recovery. So anyone telling you that, under President Trump, the merchandise trade deficit has simply changed composition, with no net benefit for America, needs a clue.

The news was also unquestionably good on the manufacturing trade deficit front. As with the China goods deficit, it remains way too humongous. But between 2018 and 2019, it grew at the slowest annual rate (1.09 percent) since 2016. That year – the final year of the Obama administration – this trade shortfall actually shrank by 1.19 percent

Full-year 2019 data for domestic manufacturing output aren’t available yet, so it’s not possible to make the crucial comparison between this trade deficit progress and industry’s overall growth. (It’s up on a third-quarter-to-third-quarter basis, though.) But when evaluating how the manufacturing trade results reflect on President Trump’s tariff-centric trade policies, it’s essential to take into account one major development that has had nothing to do with these policies – the safety woes of aircraft giant and usual trade surplus standout Boeing.

During 2019, that small rise in the manufacturing trade deficit amounted to $11.15 billion. There’s no doubt, however, that Boeing’s problems have cut deeply into its trade performance. In fact, last year, the civilian aircraft trade surplus fell from $40.25 billion to $29.77 billion – a difference of $10.48 billion. As a result, had this trade balance simply remained the same, the overall manufacturing trade deficit would have practically leveled off.

Further, Boeing’s problems also worsened the nation’s trade deficit in advanced technology products – which continued worsening in 2019. This high tech trade gap hit $132.37 billion – its third straight all-time high, and a 3.29 percent increase from the 2018 total ($4.22 billion). But without the $10.48 billion increase in the trade deficit for civilian aircraft (which are classified as an advanced technology product), the high tech trade gap would actually have narrowed slightly, and for the first time since 2016.

A classic 1960s ad sought to sell hairspray by claiming, “The closer he gets…the better you look!” From today’s standpoint, that looks kind of chauvinistic. But with a few word changes, it’s a pretty good description of the year in trade, 2019 for the United States, and for President Trump.

Making News: National Media Coverage for RealityChek’s Views on the China Trade Deal…& More!

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Boris Johnson, Brexit, China, European Union, IndustryToday.com, Making News, Market Wrap with Moe Ansari, Marketwatch.com, NAFTA, North American Free Frade Agreement, Phase One, Trade, trade deal, U.S.-Mexico-Canada Agreement, United Kingdom, USMCA

I’m pleased to announce that my views on the new U.S.-China “Phase One” trade deal have just come out via some national media organizations.

First, yesterday’s post arguing that the agreement doesn’t cut the mustard when it comes to advancing U.S. interests was re-posted on the widely read Marketwatch.com website.  Here’s the link.

Second, I was interviewed yesterday on the subject on the nationally syndicated radio show “Market Wrap with Moe Ansari.”  Click here for the link to the podcast.  My segment starts right about the 27-minute mark.  And special bonus!  We also discussed the new U.S.-Mexico-Canada-Agreement (USMCA) that replaces the North American Free Trade Agreement (NAFTA) and the reelection of Boris Johnson as Prime Minister of the United Kingdom – which surely makes the country’s departure from the European Union (“Brexit”) are certainty.

In addition, my December 11 RealityChek report on the disappointing performance of the inflation-adjusted wages earned by Americans during the Trump years was re-posted on the IndustryToday.com website.  Click here to see it.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Im-Politic: A Better Way to Pressure Mexico on Immigration

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Border Crisis, border security, Central America, Charles Grassley, illegal aliens, Im-Politic, immigrants, Immigration, Mexico, migrants, remittances, tariffs, Trade, Trump, U.S.-Mexico-Canada Agreement, USMCA

It’s not every day that I praise veteran Republican Senator Charles Grassley of Iowa. In fact, I don’t believe I’ve ever praised him in print. On trade policy he’s often especially especially clueless – his last foray into this field consisted of threatening to use his chairmanship of the Senate Finance Committee to scuttle the U.S.-Mexico-Canada Trade Agreement (USMCA) unless President Trump withdrew his tariffs on metals imports from Mexico and Canada.

(Grassley was upset because Mexico in particular had retaliated by slapping tariffs on some key American farm products exported by states like Iowa. He didn’t seem to realize that, as I’ve written here, the tariffs needed to be global in scope to be effective. Meanwhile, however serious American farmers’ woes, they began in earnest years before any Trump tariffs went into effect.)

So imagine my surprise yesterday upon learning that Grassley has proposed a response to Mexico’s foot-dragging on helping to ease the crisis on its border with the United States that’s much better than President Trump’s tariffs.

According to Grassley, the way to pressure Mexico to tighten its own curbs on the floods of Central Americans streaming through its territory toward the United States is to tax the remittances sent to their home country by Mexicans who have moved northward both legally and illegally.

Remittances consist of money sent by immigrants back to their home country – usually to relatives. They encourage immigration because they come from wages earned by newcomers to the United States that are much higher than those they can make in their countries of origin.

And we’re unmistakably talking big numbers – especially for Mexico. The country’s own central bank pegged them at almost $31.5 billion last year. That’s more money coming into the Mexican economy than it makes from oil exports, and in fact its second largest foreign exchange earner after auto parts exports.

Unlike tariffs, remittances taxes wouldn’t harm Americans who buy imports from Mexico – whether consumers or businesses. All the victims would be Mexicans in Mexico. And because so many poor Mexicans in particular rely on these funds to help maintain and improve their living standards, a smaller flow would squeeze their finances and surely increase political instability in a country that’s long suffered more than its share of turmoil. Don’t think Mexico’s leaders – who are already sounding inclined to make concessions to Mr. Trump to avoid the threatened tariffs – could brush these sanctions off.

At least as important, unlike the proposed tariffs, remittance taxes wouldn’t endanger Congressional passage of the USMCA or undermine the Trump administration’s China trade policies by reducing Mexico’s attractiveness as an alternative export platform for companies looking to move in whole or in part out of the People’s Republic.

The President has actually spoken of taking this step to raise the resources needed to finance a Border Wall, but never followed through. At the time, covert and overt Open Borders supporters charged that the move could be counterproductive, since the remittances increased the well-being of their recipients enough to encourage them to stay in Mexico.

But since these payments still represent only a fraction of the earnings of Mexicans in the United States, it makes no sense to believe that many Mexicans in Mexico seriously contemplating moving across the border would be satisfied by receiving a fraction of a loaf if they thought it was all potentially available.

It’s possible that the Trump tariff threat could suffice to produce enough of a Mexican response to satisfy him on border security and declare victory with no levies. In this vein, it’s significant that Mexico’s president has already signaled his willingness to appease Mr. Trump somehow. But a remittances threat could have accomplished the same goal with much less muss and fuss. If negotiations with Mexico can’t resolve the issue by the announced Trump deadline of June 10, switching tactics to a remittances tax a la Grassley would be an unmistakable no-brainer.

(What’s Left of) Our Economy: A New North American Trade Study’s Crucial Footnote

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automotive, Canada, Center for Automotive Research, Mexico, NAFTA, North American Free Trade Agreement, regional content, rules of origin, tariffs, trade bloc, Trump, U.S. International Trade Commission, U.S.-Mexico-Canada Agreement, USITC, USMCA, {What's Left of) Our Economy

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.

Making News: On Israeli TV, “Jersey Joe” Piscopo Radio…& More!

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AM 970 The Answer, Breitbart.com, Brexit, i24News, Making News, retailers, stock market, The Joe Piscopo Show, Trade, U.S.-Mexico-Canada Agreement, USMCA

I’m pleased to report several recent media appearances.

Last night, I was interviewed on Israel’s i24News TV network on what could be the decisive stage in negotiations between the European Union and the United Kingdom over Brexit – the latter’s decision to leave the former.  Unfortunately, i24News doesn’t make streaming videos of its content available gratis.

Yesterday morning, I appeared on The Joe Piscopo Show on New York City’s AM 970 The Answer radio.  Since I only found out about this opportunity in the wee hours that morning (don’t ask!) I couldn’t send out a pre-program alert, but a podcast is available here.

Scroll down to the link naming me, click the play button, and if you want to skip to my segment, drag the thingamajig along the bottom to the 40-minute mark.  You’ll hear a discussion that ranged from the stock market’s recent gyrations to the new U.S.-Mexico-Canada [Trade] Agreement to the troubles of American retailers.

And on Thursday, October 11, Breitbart.com featured my finding that metals-using industries in the United States were defying all expectations that they’d start hemorrhaging jobs due to the Trump steel and aluminum tariffs – not to mention refuting numerous news reports claiming that these jobs were already being shed.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Making News: Last Night’s National Radio Interview Podcast on the New Trump Trade Deal Now On-Line

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Breitbart News Tonight, Making News, NAFTA, North American Free Trade Agreement, Trade, U.S.-Mexico-Canada Agreement, USMCA

I’m pleased to report that last night I got yet another short notice chance to appear on national radio to discuss the U.S.-Mexico-Canada Agreement (USMCA) – the new trade deal reached by the three North American countries to replace the North American Free Trade Agreement (NAFTA).

But although you can’t listen live to that appearance on Breitbart News Tonight, the podcast is available on-line, and you can access it at this link. Scroll down until you see the episode with my name.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

 

 

Making News: Podcast of National Radio Interview on Trump’s New North American Trade Deal…& More

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China, Gordon G. Chang, i24News, Making News, NAFTA, North American Free Trade Agreement, Thaddeus McCotter, The John Batchelor Show, Trade, Trump, U.S.-Mexico-Canada Agreement, USMCA

The opportunity came in too late to post a preview, but I’m pleased to announce that I was back on John Batchelor’s nationally syndicated radio show last night.  The subject – discussed with John, co-host Gordon G. Chang, and former Michigan Republican Congressman Thaddeus McCotter – was the new successor trade deal to the North American Free Trade Agreement (NAFTA), and how its negotiation might impact U.S.-China trade relations.  Click here for the podcast. (Note:  The official name of the new agreement is the U.S.-Mexico-Canada Agreement, or USMCA.)

Also last night, and too late to preview, I was interviewed on Israel’s i24News on the same subject.  You can see the streaming video here, but first you need to become a paid subscriber to the network.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

 

(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.”