Trump Abolishes NAFTA! Or Maybe Not…

September 13, 2018
Photo Credit: 
REUTERS/Edgard Garrido

President Trump is a man of extravagant claims and short soundbites. Upon reaching an agreement in principle with Mexico in late August, he announced he would withdraw from the North American Free Trade Agreement (NAFTA) (“the worst trade deal in history”) and convince Canada (with the threat of 25 percent auto tariffs) not only to sign on the same dotted line, but also to get rid of tariffs on US dairy exports.

At this writing, the text of the new “US-Mexico Free Trade Agreement” has not been released, so observers have had to rely on the US Trade Representative’s “Fact Sheet” plus media reports of a secret side agreement on autos. But with the information in hand, it’s possible to draw tentative conclusions about what’s happened. First, the agreement is far from a done deal—which is just as well since it mixes some very bad measures with some positive ones. Moreover, Canadian accession cannot be taken for granted and Congressional ratification in 2019 will be a hard slog.

Under the Trade Promotion Authority Act (TPA), extended for two years in June 2018, Congress agreed to vote a new trade agreement up or down—no amendments permitted—within 90 days after submission of domestic legislation crafted to implement the international text. Note, though, that the TPA also contains other requirements that would make it all but impossible for Congress to ratify the new Mexican Agreement—whether or not Canada signs—in the remaining months of 2018.

Moreover, haggling over the text and side agreements of the Mexican deal is bound to continue almost up to the date of submission (and the triggering of the 90-day deadline). Congress wants its say on the fine print, as do Canadian and Mexican negotiators—not to mention influential interest groups in all three countries. All told, then, it’s clear we’re not yet close to a done deal.

The Scorecard

First the good news. Some measures in the agreement were lifted from the Trans-Pacific Partnership (TPP), which would have served US interests very well, but was rejected out of hand by President Trump on his first day in the White House. Among them:

The chapter on digital trade would ensure free flow of data, text, pictures, and voice; bar taxes and duties on electronic transmissions; protect the intellectual property embodied in proprietary source code; prohibit measures that require the use of servers located in the receiving country; and in other ways promote this highly promising vehicle of international exchange.

The chapter on intellectual property would ensure 10 years of exclusivity for costly data collected to evaluate the safety and efficacy of new biologic drugs, grant life-of-author-plus-75-years for copyright protection, and spell out enforcement tools for stopping piracy and infringement of patents, copyrights, trademarks, and trade secrets.

The chapter on the de minimis threshold would establish a minimum of $100 per shipment for tax-free, tariff-free, and simplified customs forms, up from the current Mexican threshold of $50 (the US figure is already $800). This would facilitate rapid growth in online commerce—not only from Amazon but also from thousands of small- and medium-size enterprises seeking to eliminate the middlemen.

The chapter on financial services would ensure virtually the same business freedom for all types of financial services—banking, brokerage, mortgage lending, etc.—between New York and Mexico as between New York and California. This is close to existing Mexican practice. But with Andres Manuel Lopez Obrador, who ran as a populist, taking the office of president of Mexico in December, US financial firms are rightly eager to build barriers against backsliding.

The chapters on minimum labor and environmental standards for traded goods lay out high aspirations and promise tough enforcement. Details on the latter remain to be revealed, though, so it’s a mystery whether the contemplated arbitration systems would be effective. Rep. Sander Levin (D-MI), a longtime advocate of labor rights, has already pronounced the labor provisions inadequate, and therefore not likely to attract Democratic votes.

The chapter on agriculture reinforces the free trade regime that NAFTA created between the United States and Mexico, extends the guarantees to new agricultural biotechnology, ensures that sound science underlies safety and sanitation measures applied to cross-border trade, and protects geographic names for wine and distilled spirits (hence no threat of Mexican bourbon or California tequila on the horizon).

Unfortunately, though, the deal includes a lot more than a bunch of good-governance measures lifted from the doomed Trans-Pacific Partnership agreement. The worst are three interlocking measures to stifle competition in the auto industry and to gouge Americans when they next buy a car or pickup truck.

The first would require that 75 percent of the value of autos and parts sold tariff-free must originate in North America, up from the 62.5 percent requirement in NAFTA. This is aimed at limiting the use of parts from Japan, Korea, Thailand, and China. The second requires that at least 40 percent of the value of autos and parts must be made by workers paid $16 or more per hour to qualify as North American. This would make lower-tech Mexican factories uncompetitive, stranding thousands of Mexican workers who would be delighted to earn half that much.

The third and most insidious measure: a side agreement that would require Mexico to limit its assembled auto exports to the United States to 2.4 million annually, and its parts exports to $90 billion annually. Any excess will be subject to “national security” tariffs of 25 percent. Over time, this one-two-three punch would raise the price of cars and trucks in America by thousands of dollars. 

In the same mercantilist spirit—but in sheer dollars, not as great a rip-off for consumers—the Agreement chokes off breathing room in already tight rules of origin for textiles and apparel—the so-called NAFTA “yarn forward” rules. The goal is presumably to protect the much-diminished US industry. If it succeeded in choking off bargain materials from suppliers in, among other countries, Guatemala, Indonesia, and China, the result would be higher prices for clothing, carpets, and drapes.

Next in the bad news mix are restrictions on dispute settlement. Details have not been released, but it appears that Mexico agreed to forgo or circumscribe arbitration when the United States imposes anti-dumping or countervailing duties against Mexican exports. As well, Mexico agreed to narrow the scope of Investor-State Dispute Settlement that can currently be invoked when expropriations or arbitrary regulations reduce the value of US investments on Mexican soil.

Both departures from NAFTA norms would make foreign investments in Mexico less secure, in the first case because access to the US market would be less assured, and in the second because restraints on the new populist administration in Mexico would be less binding. Trump apparently believes that US investment abroad comes at the expense of US investment at home. Like much else in Trumponomics, this is based on a fundamental misunderstanding of economics in which it is assumed that foreigners’ gains are Americans’ losses, and vice versa.

In the same spirit, the Trump administration demanded a sunset clause on the agreement in 16 years, and a formal review in six years. Thus, if Trump’s successor shares his view on trade, Mexico will be publicly pressured to give up more ground in six years. Investors contemplating building factories and such in Mexico will thus presumably think twice.

Will It Stand?

The departures from open trade in the draft agreement will generate pressure from Congress to revise it before the 90-day clock starts ticking. But the biggest stumbling block for congressional ratification would be the absence of Canadian accession. Apart from very real concerns about disruption in trade and investment ties with the United States’ largest trading partner, the exclusion of Canada would give Democrats a very good excuse to turn their backs on an agreement negotiated by Trump.

But even if Republicans still control the House in 2019, and even if Trump brings Canada on board, the vote will be tough. Several Republicans are sure to dislike the agreement either because it’s too protectionist—some of them are still serious about protecting open trade—or because it’s not protectionist enough. (Sen. Rubio of Florida, for example, wants stiff barriers against Mexican tomatoes.)

This brings us to the biggest wild card: Trump’s letter to President Peña Nieto and Prime Minister Trudeau notifying them that the United States intends to withdraw from NAFTA on March 1, 2019 (the end of the six-month waiting period stipulated in NAFTA). The letter is not the same as actual withdrawal—that would be a separate presidential act on or after March 1.

It’s not clear in September 2018 whether the prospect of final withdrawal without a new agreement would add or subtract votes from ratification. What is clear is that withdrawal without congressional assent would trigger a constitutional battle over presidential powers that is likely to end up in the Supreme Court. Meanwhile, the deintegration of the North American economy would impose substantial costs in the form of industrial dislocation and uncertainty, not only on Canada and Mexico but also the United States. A greater self-inflicted wound to America’s position in the global economy is hard to imagine.