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Toward ‘America First’ NAFTA

Politics / Protectionism Sep 03, 2018 - 10:19 PM GMT

By: Dan_Steinbock

Politics Despite the Trump administration’s frantic last-minute efforts to hammer the NAFTA agreement, the attempt failed within the US timeline, so the talks continue. Why is the revised deal so important to the White House?

Last Friday, the trade talks between the United States and Canada broke off without an agreement.

The negotiations on the revised North American Free Trade Agreement (NAFTA) are not over, however. The talks continue and US Trade Representative Robert Lighthizer will meet again Canada’s foreign minister Chrystia Freeland.


Trump’s art of the deal

In the past year, the US and Mexican negotiators have been able to agree on a tentative outline for a new pact. The two also claim progress in the so-called “rules of origins” for automobiles, which govern how much of a car must be made within the NAFTA countries to avoid tariffs.

According to current rules, any car sold in North America that includes 62% of parts made within the region are exempt. However, the Trump administration wants to raise the figure to 75% hoping that more parts would be made in the U.S.

The current talks remain focused on agricultural issues, particularly the dairy industry. President Trump has called Canada’s dairy regulations protectionist and harmful to U.S. dairy farmers. In reality, both countries have their subsidy systems. Canada’s dairy sector operates under a regulated supply management system, whereas the U.S. government supports dairy farmers directly. Reportedly, U.S. support equaled 73% of U.S. dairy market returns in 2015.

In the dairy industry, the subsidies will artificially maintain lower prices, which effectively deter more competitive dairy industries, particularly from emerging and developing markets. In the automobile industry, the new NAFTA will increase the costs of cars sold in North America, which, in turn, will reduce offshoring, disrupt the ecosystems of car producers and translate to higher prices to consumers.

Under the revised NAFTA, a share of the car parts would have to be built by workers making at least $16 an hour. Adding vacation weeks and assuming 40 hours a week that ends up being an estimated $33,300 per year in salary. In the U.S., that’s only 55% of average per capita income; in Canada, almost 75%; but in Mexico, a whopping 360%, or 3.5 times higher than average per capita income. Under such rules, Mexico would gain the most, America still the least

The other implication is even more important. If the Trump administration will seek to project its revised NAFTA as a blueprint elsewhere in the world (as the Clinton administration tried with its NAFTA deal in the ‘90s), it would mean a war against all offshored production capacity outside the U.S – which in the past four decades have sustained relatively low prices for consumers in North America, while boosting living standards in less-prosperous economies.

If Canada will not agree to a revised NAFTA, Trump has vowed to sign a trade deal with just Mexico. He expects Canadian concessions because he thinks that the country has “no choice” but to make a deal. However, Freeland said on Friday that “Canada will only sign a deal which is good deal for Canada.”

Nevertheless, President Trump has informed Congress that he anticipates a signed trade deal with Mexico and possibly Canada in 90 days, according to U.S. Trade Representative Lighthizer’s statement.

From North American NAFTA to America First NAFTA

In the past year, Canada and Mexico have been hedging their bets against a potential NAFTA collapse by pushing for deals with new partners, particularly with China and other Asian countries.

NAFTA’s record has proven mixed since its inception in 1994. While the agreement has broadly benefited consumers, critics complain that it has contributed to investment outflows, unemployment, and offshoring. Nevertheless, most Americans support NAFTA, as does the majority of Canadians. However, NAFTA has not boosted consumer welfare significantly in Mexico, where per capita incomes have been lagging behind those in the U.S. and Canada.

In the U.S., the ongoing tariff wars and increasing friction with U.S. trade partners in the Americas, Europe, and Asia has added to uncertainty in the mid-term elections. In turn, Mexico is heading toward a dramatic transformation, which is precisely why Trump wants a signed deal before December when Mexico’s president will change.

Last July, the center-left López Obrador won a landslide victory in Mexico’s presidential election. While Obrador has long been a critic of NAFTA, his center-left election platform was more moderate. Unlike the incumbent center-right President Enrique Peña Nieto, he would not see the failure of the NAFTA renegotiation as fatal for Mexicans.

In Canada, conservatives have mocked Justin Trudeau's government, posturing for the 2019 elections. Nevertheless, liberals have been rising in recent polls as Canadians rally behind Trudeau against Trump tariffs. As the three-way talks with Canada and Mexico fell apart in June, the U.S. has been conducting one-on-one talks with Mexico, ignoring Canada.

The separate bilateral trade deal with Mexico became possible only after the U.S. dropped its “sunset clause”; a trade mechanism to force a renegotiation of NAFTA every five years if the new terms failed to foster “more balanced trade” between the three member countries.

Relying on his imperial rule-and-divide strategy, Trump wanted U.S. Trade Representative Lighthizer to force an agreement, even a diluted one, with Mexico, so that Canada’s Trudeau would have to sign the final “America-First-NAFTA” deal.

Nevertheless, if and when the final treaty is signed, it will not be the one that Trump initially wanted. Moreover, due to general distrust on the Nieto government, Obrador is likely to monitor both the fine print and the execution of the treaty.

While Trudeau does need a deal, he is trapped between an unwillingness to settle for a “bad NAFTA” and an inability to reject a revised NAFTA treaty if both the U.S. and Mexico agree on final terms.

The take-it-or-leave-it stance

The goal of the NAFTA talks – and other FTA talks by the Trump administration - is not to achieve multilateral compromise. To the White House, that is bad history.

Instead, the strategic objective of the Trump White House is either to redefine the terms on the basis of U.S. economic leverage and unipolar geopolitics or – if that is not acceptable to other parties – to withdraw the U.S. from such FTAs.

That’s the strategy that Trump will soon try to force on the proposed new Trans-Pacific Partnership (TPP) in Asia Pacific, the new transatlantic TTIP with Europe, and other FTAs elsewhere.

In the Bush era, the White House defined loyalty in terms of security partnerships. As President Bush put it, “Either you are with us or you are against us.”

In the Trump era, the definition has changed, as evidenced by President Trump’s rhetoric. Now the assumption is, “Either you accept our redefined terms, or you get nothing.”

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

© 2018 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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