The New and Not Improved NAFTA

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The New and Not Improved NAFTA

Oct 9, 2018 JEFFREY FRANKEL

US President Donald Trump has called the United States-Mexico-Canada Agreement, which succeeds NAFTA, “the single greatest agreement ever signed." In reality, it is not as good as the Trans-Pacific Partnership, from which Trump withdrew the US upon taking office, nor is it particularly better than the agreement it replaced.

CAMBRIDGE – US President Donald Trump acts as if he has pulled off a smashing victory by replacing the North American Free Trade Agreement (NAFTA) – supposedly “the worst trade deal ever” – with the new United States-Mexico-Canada Agreement. But the truth is that, while this outcome is better than an end to free trade in North America, the USMCA is no improvement over the status quo.

Of course, this is Trump’s modus operandi: threaten to do something catastrophic, so people are relieved when things get only a little bit worse. That is what he did with North Korea, when he insulted its leader, Kim Jong-un, and threatened to rain down “fire and fury” on the country. Compared to nuclear conflict, his eventual meeting with Kim seemed like a triumph, even though it produced little actual progress.

Trump’s own mischaracterization of that meeting’s outcome – the problem of a nuclear-armed North Korea, he falsely asserted, had been “solved” – is another standard Trump tactic. He calls the USMCA “the single greatest agreement ever signed.” For Trump, all NAFTA really needed was a new name – one that, as Eswar Prasad points out, literally puts “America First” – to enable him to pretend for his supporters that he achieved something positive.

To be fair, the name is not the only difference between the USMCA and NAFTA. Four changes in particular have drawn attention.

The first change is the introduction of two measures pertaining to the auto industry. The agreement requires that, to avoid tariffs, 75% of an automobile’s content originate within North America – an increase from 62.5% – in order to reduce imports of components from Asia. It also requires that by 2023, 40-45% of production come from workers who are paid an average of more than $16 per hour, well above Mexican wage levels.

This will bring some benefits to some American autoworkers, at the expense of everybody else. Not only will consumers face higher costs for autos; the disruption of existing efficient supply chains may even leave the US auto industry as a whole worse off, as it undermines the international competitiveness of North American output. Increased costs for steel and aluminum inputs as a result of Trump’s tariffs (leaving aside foreign retaliation) only exacerbate the industry’s problems. The auto provisions in the USMCA are a step backward from NAFTA.

The second prominent change in the USMCA is its agricultural concessions, particularly Canada’s agreement to give US producers access to up to 3.6% of its dairy market, worth about $70 million. The change is notable because both the US and Canada have long protected their dairy farmers from competition, even more than the rest of their agricultural sectors. Now, US milk producers will enjoy some benefits, at the expense of their Canadian counterparts. So far, so good.

But this concession, the equivalent of 0.00003% of US total exports, will have no discernible impact on the US trade balance. Trump cannot truthfully claim a victory relative to the status quo he inherited – even to his mercantilist supporters. In fact, Trump’s predecessor, Barack Obama, had managed to wrest similar dairy concessions from Canada in 2015 as part of the Trans-Pacific Partnership, from which Trump withdrew the US immediately upon taking office.

Overall, the TPP would have been better than the USMCA, even from a narrow mercantilist perspective. After all, in the USMCA negotiations, the US agreed to give Canada increased access to its own dairy market, as well as to two of its other most highly protected agricultural areas: peanuts (and processed peanut products) and sugar (including sugar-containing products). Far more importantly, under the TPP, nine other Pacific Rim countries (like Vietnam) would have reduced major barriers to US exports.

The third feature of the USMCA that has drawn the most attention relates to dispute-settlement mechanisms. The US and Canada agreed to dropinvestor-state dispute settlement, which many have criticized for giving corporations so much power in international negotiations that they might, in theory, advance their interests to the detriment of, say, health or the environment.

The US agreed, however, to keep NAFTA’s “Chapter 19” procedure for settling other trade disputes. This concession might seem surprising, because the Trump administration’s negotiators yearned for Americans to be designated as prosecutor, judge, and jury in anti-dumping and countervailing-duty cases. But Canada was never going to accept such a one-sided approach, and rightly so – a good outcome.

The fourth notable change in the USMCA is the introduction of a sunset clause. Initially, the Trump administration called for a provision requiring the new agreement to be renewed every five years, with sunset as the default option – an extreme demand that would have crippled the deal. The perpetual uncertainty over the agreement’s survival would have severely impaired businesses’ ability to plan ahead. Canada would never have agreed to this demand.

Fortunately, the US backed down. But it did secure a less stringent provision: the USMCA must be renewed every 16 years. One hopes that future reviews will take place at times when more sensible leaders are in charge, and perhaps will eliminate the automatic sunset clause.

The USMCA includes many other provisions, which will take time to assess. There is a provision to enhance worker protection, though less extensive in coverage than the TPP. Also reminiscent of the TPP, there are provisions for the digital economy and the extension of intellectual property rights in areas like copyright and biologics data – wins for US corporations and setbacks for anti-globalizers.

Ultimately, the rebranded NAFTA is a step in the direction of the TPP that Trump so reviled. It is not as good as the TPP, nor is it an overall improvement over NAFTA. But it is better than blowing up trade in North America.

JEFFREY FRANKEL

Writing for PS since 2000 
144 Commentaries

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Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He is a research associate at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.