The latest batch of tariffs, however, are on items that are directly obvious to customers in stores, including clothing, shoes, phones, video games and practically every item on or under a Christmas tree. Trump’s latest move is likely to have been a shock to most observers. In fact, I had bets going with a wide range of people that Trump would not make it out of August without imposing tariffs on the so-called “List 4” products. Most argued I was crazy. Trump, they said, would not escalate the trade war at this time. He would most likely bide his time until next year, engaging in trade talks with China with just enough enthusiasm to say that he was working on the problem, but not enough to solve anything too soon before the election. Voters can have short attention spans and an early resolution of the China problem would not give him an electoral bounce in November 2020. The List 4 hearings in Washington in mid-June involved hundreds of companies across seven days and nearly 3000 submissions. Nearly all were united in arguing against more tariffs on China and about the damage to be done by imposing tariffs on the remaining products, which had been carved out of the previous tariff policies for good reasons. But I thought Trump would ignore this advice. Hearings in Washington took place already, clearing the way for the imposition of tariffs at any point. To expect Trump not to impose them was like asking a child not to play with an exciting new toy that has been placed within reach.
There is no justification that allows a government to raise tariff levels based on immigration levels. To take such a step means that the United States has decided that it will no longer bound by international trade rules. The early commentary on the Mexico decision has been nearly entirely focused on which companies in which sectors will be most at risk from an increase in tariffs by 5% on June 10, with additional increases monthly afterwards until every inbound product faces 25% tariffs by October 1. Such a damage assessment is important for firms that suddenly awoke to find themselves in the front lines of a new trade conflict that they did not anticipate. But it misses the larger point—everyone is affected by this decision. It is not just companies that ship goods from Mexico to the United States that should be paying attention. If the US proceeds down this path, it is the end of the global trade regime that has given stability and lowered risks for an increasingly larger share of companies and consumers since the 1940s.
American trade policy has been like the proverbial frog in a pot, slowly simmering under increasing heat. At a certain point, the frog will not be able to survive, even if it were suddenly rescued. The US, it appears, has reached this juncture. Were any country other than the United States to have taken this set of steps in a week, Washington would have been aghast. Instead, it was largely shrugged off as “just another week in DC.” The fact that the United States could take such actions as escalating tariffs to 25% on potentially $500 billion in goods from China, possibly seal the fate of one of the most important telecommunications firms globally, make national security arguments about the threat level emanating from cars arriving from US allies, and continue to watch the multilateral trade system crumble and then argue that it is “just another week” is especially telling.
The third lesson is that the details matter. Some of the provisions that are currently being ignored by commenters on NAFTA are buried deep in the texts and schedules. These may turn out to be deeply consequential for NAFTA parties. Some may also affect outside parties. As an example, the auto rules of origin require a significant and growing share of autos, trucks, parts, components, steel and aluminum to be made within NAFTA (with more expensive labor inputs as well). For suppliers based outside of NAFTA, this is going to be extremely problematic or even catastrophic. These orders could be cancelled outright and never replaced. Alternatively, NAFTA 2.0 could force a renewed look at offshoring or sourcing entirely for export. Either way, existing supply chains are likely to be under severe stress.
The fourth lesson is that NAFTA contains some problematic provisions that might spread elsewhere.
Since NAFTA 2.0 builds on the base of the original NAFTA, the new deal had some advantages over the TPP. For example, tariffs between the parties are already set at zero. This remains, although do note that there are very complicated tariff rate quotas in place in NAFTA 2.0 that were not scrapped. Indeed, the level of genuinely new market access granted to partners that have known and worked with one another for decades is vanishingly small. While much focus, as an example, has been on Canada’s new market access for dairy, the total amount given amounts to barely 0.4%. And the United States, in return, has an equally complex system of barriers in place to protect its own dairy industry from competition (as well as sugar, oranges, and others). The deeply problematic bits of the agreement can be found buried in the texts. For instance, the rules of origin (ROO) are incredibly complicated. Given that tariffs are zero, the only way to keep out goods is to craft ROOs that are impossible to follow. Clearly, for many products, this objective has been met. The level of NAFTA content required in fairly large swaths of products is extremely high. Commentators keep focusing on the insane requirements for auto production, but note that for a wide range of goods, new NAFTA content rules require 50% or more content. To make matters worse, in many products, these rules tighten after 3 years, rising to as much as 70% local (ie NAFTA) content.