NAFTA

Mexico Solved? Not So Fast…Significant Damage Remains

Mexico Solved? Not So Fast…Significant Damage Remains

The net result, for Trump, is that he did what he wanted and it worked.  Flush with this victory, it is highly likely that Trump will double down on his strategy in the future.  After all, he will reason, his advisors argued against his Mexico gamble and yet it paid out so well for him.  Why, then, should he listen to them if they advise against similar trade and tariff policies again? Trade is now a tool to be used for non-trade objectives, as we have noted previously.  While clearly illegal, such a distinction does not matter.  Trump was willing to impose tariffs on Mexico in direct contravention of existing World Trade Organization prohibitions, NAFTA rules and the upcoming NAFTA 2.0 rules.  He used a dubious interpretation of the American emergency powers act to justify his decision domestically.  The gloves, so to speak, are clearly off.  And, having won a big match in this way, there is every reason to believe such tactics will be tried again.  Future opponents should be forewarned. 

The Five Lessons of NAFTA Negotiations

The Five Lessons of NAFTA Negotiations

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.

Evaluating Trade Deals Like NAFTA 2.0

Evaluating Trade Deals Like NAFTA 2.0

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.

What Happens If NAFTA Collapses?

The damage would be swift.  Businesses, farmers and consumers have become so accustomed to NAFTA over the decades that most have forgotten what benefits actually flow from the agreement.  But focus on just the problems faced by US agriculture.  Right now, nearly all agricultural products go duty free into both Canada and Mexico.  Most items flow with limited paperwork and little customs hassle. This will not be the case if NAFTA ends. US exports of corn into Mexico will suddenly face tariffs of 10-15%.  Soybeans, grains and flours jump overnight to 10-15% as well.  Mexico is one of the best markets for US red meat exports, especially for many cuts that Americans do not favor.  Many of these products could face tariffs as high as 234%.

The New US Policy is Disruption: Implications for Asia

In short, evidence of last week’s US engagement in NAFTA, KORUS and 301 all provide a much clearer window into the extent of American disruptive trade policy.  While some staff members will be trying to hold the pieces together, it is not obvious how well they will fare when led by a President that views unpredictability as a key strength and does not place a high value on maintaining the global trading system.  For Asia, it will be difficult to rely on the United States in trade.  This is not to say that the US will simply disengage.  It is that the Americans will behave in ways that may not have been experienced in the past.  They will be less willing to defend the global trading system and more willing to take unprecedented risks to tackle what they view as unfair trade practices.  These challenges will be handled unilaterally, if necessary.