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The cost of dragging Mexico and Canada kicking and screaming to the table is so high that the damage done by doing that is not worth the gains, experts say. (Image: Knowledge@Wharton)
Wednesday, September 12, 2018
Perspectives

NAFTA 2.0 Tarnishes, Hurts US Image


Donald Trump is hurting US auto sector, boosting prices and inflation.

LATINVEX SPECIAL
Knowledge@Wharton

In its bid to recast NAFTA (the North American Free Trade Agreement), the U.S. secured the buy-in of Mexico last week, but it still faces resistance from Canada, the treaty’s third partner. The U.S. doesn’t have any leverage in its discussions with Canada, and some of its proposals could end up costing consumers more, according to Wharton management professor Mauro Guillen and Fordham University adjunct law professor Matt Gold. The U.S. posture in the discussions could also erode its image as a champion of free trade, and protectionist policies would come back to haunt it, they warned.

When the U.S. announced its deal with Mexico, the country braced itself for a recalcitrant Canada. The U.S. Trade Representative stated on August 31 that U.S. President Donald Trump has notified Congress of his intent to sign a new trade deal “with Mexico — and Canada, if it is willing,” in the next three months.

Canada’s minister of foreign affairs, Chrystia Freeland, and U.S. Trade Representative Robert Lighthizer have held meetings in recent days in Washington, D.C., to renegotiate the treaty. Trump said on [September 5, 2018] that he [expected] a deal with Canada in the next two or three days. “We’ll see how it works out,” he told reporters. “And if it doesn’t work out, that’s going to be fine for the country, for our country. It won’t be fine for Canada.”

LACK OF LEVERAGE

The U.S. is not really in a position to dictate terms to Canada, said Gold, who was formerly deputy assistant U.S. trade representative for North America in the Barack Obama administration. “We just don’t really have the leverage. Trump never had the leverage to get most of the things that we wanted in this renegotiation.”

“The image that the U.S. is projecting to the rest of the world is that we’re no longer the champions of free trade,” said Guillen. “This is going to come back to haunt us. If other countries perceive the U.S. as being protectionist, this is going to hurt us in the future. These things have costs. And I don’t think we’re paying enough attention to the costs.”

Contrary to the impression the administration has conveyed, Gold noted that the agreements relating to the digital economy and agriculture are not exactly concessions that the U.S. has extracted from Canada or Mexico. “Those are things that all three countries wanted to update, to benefit them mutually,” he explained. The major gain for the U.S. in the renegotiated agreement with Mexico is a change in the rules of origin for automotive products favoring American content, he noted.

Under the deal with Mexico, 75 percent of auto content will be made in the U.S. and Mexico (up from 62.5 percent earlier), and 40 percent to 45 percentof auto content will be made by workers earning at least $16 an hour. Those two measures are aimed at encouraging U.S. manufacturing and regional economic growth, and driving higher wages for U.S. workers. The two countries have also reached an agreement covering protection of intellectual property rights, digital trade, financial services, and labor and environmental obligations. A related agreement covers agricultural trade between the two countries, and its highlight is the retention of zero tariffs. The countries would revisit the deal after six years. Trump had earlier asked for a sunset clause where the agreement ceases to exist after five years unless the countries renew it.

TOUGHENING POSTURES

One sticking point with Canada is the U.S. demand to remove NAFTA’s Chapter 19, which allows for a dispute resolution mechanism where actions by either of the participating countries could be challenged by independent panels. Another source of contention is Canadian tariffs on U.S. poultry eggs and traditional dairy products.

Gold said he didn’t expect Canada to budge. “The U.S. and Canada are stuck on those two issues, and I don’t think the Canadians are going to give on either of them. I think their strategy from the beginning has been to publicly act like they’re taking Trump’s threats to pull out of NAFTA seriously, but privately they never believed it would happen, and they still don’t.”

INFLATIONARY IMPACT

Guillen also criticized the requirement of an hourly wage of $16 for auto workers. “Money doesn’t rain from heaven — consumers are going to pay for that,” he warned. “This is all for the sake of saving 5,000 jobs or 10,000 jobs — that’s about it. Remember, those workers are also consumers, so they’re also going to be hurt as consumers if this continues.”

As it happens, fears of higher prices have already led to a spurt in auto sales. Ford Motors last week announced a 20.6 percent increase in SUV sales with more than 72,000 vehicles sold in August 2018. “The surge in sales has a lot to do with buyers being concerned that the prices of cars and light trucks are going to go up significantly — the president has been threatening to impose new national security tariffs on those,” said Gold. Trump has threatened to impose 25 percent tariffs on car imports into the U.S. from Canada if the two countries cannot agree on concessions on dairy supply management and removal of Chapter 19 from the treaty.

Trump’s threats to impose tariffs on autos and the renegotiation of the North American content requirement — the automotive rules of origin — “are really disconnected from any reality that exists in the automotive sector,” said Gold. “The automotive companies do not support the reoriented automotive rules of origin, and even auto labor was very cautious about supporting Trump’s desire for changes.”

“The reason the companies don’t want to change the rules is they’ve been making investments over the last 20 years based on the existing rules,” said Guillen. “The one thing that business hates is uncertainty.”

ERODING BARGAINING POWER

Guillen said the U.S. also needs to consider how much bargaining power it could have in world trade in the long run. “The bargaining power of the U.S. depends on the size of its market, and up until recently it has been the largest market in the world,” he noted. However, the European Union would be the largest market if it is viewed as a single market, followed by China and then India, he said. “Even now, the president is having trouble bullying trade partners as small as Mexico and Canada. Just imagine [the setting] when the U.S. no longer is by a wide margin the largest market in the world — and that’s going to happen within five or 10 years.”

In order to come out smelling good in that emerging scenario, the U.S. needs to avoid its current posturing, Guillen said. “We are undermining our own position by bullying today and then tarnishing our reputation as not being champions of free trade,” he said. “And that’s going to cost us dearly…. For a few gains today, we’re potentially mortgaging our future in terms of the image and the power that we would have in negotiations for years to come.”

MISSED OPPORTUNITIES

What really ails NAFTA now, and how can it be fixed? Gold said over its 24 years, the agreement has been updated several times to incorporate changes in the broader environment such as the advent of digital commerce, wireless calling, inspection rules for animal products, plant products and grain, and so forth.

Mexico and Canada have not always been cooperative, which sometimes frustrated the process, according to Gold. “The cost of dragging Mexico and Canada kicking and screaming to the table is so high that the damage done by doing that is not worth the gains,” he said, recalling his days as President Barack Obama’s lead advisor on NAFTA. “[It does] much too much damage to force them the way Trump has.”

However, the Trans-Pacific Partnership (TPP) would have provided the U.S. a bigger say, according to Gold. The 12-nation TPP would have included Canada and Mexico, and the U.S. could have said that it no longer needed NAFTA for free trade and pulled out of it, he said. But Trump’s decision to pull the U.S. out of the TPP closed that window, he noted.

Pulling out of the TPP was a costly error for the U.S. according to Gold. “Sometimes in a multilateral free trade agreement we have far more leverage, not less,” he said. With the TPP, the U.S. could have won the trade concessions it sought from Canada and Mexico because it could offer those countries valuable access to other markets, he explained. The U.S. had offered Canada free trade access to Japan’s market, which it didn’t have, and it also offered both Canada and Mexico similar access to multiple Asian-Pacific markets, he added. “In the NAFTA renegotiation we don’t have anything to offer them [because] they already have free trade access to the [NAFTA] market. We can’t really pull out, even if we threaten to.”

Guillen said another factor is Trump’s apparent belief that all negotiations should be bilateral. “He doesn’t like to sit at the table and negotiate with more than one person,” he added. “It’s very difficult in this interconnected world actually to negotiate bilateral trade agreements one at a time, and then hope that things will somehow make sense.”

According to Gold, Trump’s motives for renegotiating NAFTA are misguided. “Most of what Donald Trump wants to do with NAFTA is entirely about his own politics — not really about helping any particular sector or workers,” he said. “There tends to be a disconnect.”

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.


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