Late Sunday, President Donald Trump announced that the Canadian government had given in and was joining the United States and Mexico in a revision of the NAFTA trade agreement, one of Trump’s key 2016 campaign promises.
Late last night, our deadline, we reached a wonderful new Trade Deal with Canada, to be added into the deal already reached with Mexico. The new name will be The United States Mexico Canada Agreement, or USMCA. It is a great deal for all three countries, solves the many……
— Donald J. Trump (@realDonaldTrump) October 1, 2018
….deficiencies and mistakes in NAFTA, greatly opens markets to our Farmers and Manufacturers, reduces Trade Barriers to the U.S. and will bring all three Great Nations together in competition with the rest of the world. The USMCA is a historic transaction!
— Donald J. Trump (@realDonaldTrump) October 1, 2018
Here are some highlights of the agreement:
- Canada agreed to ease protections on its dairy market, among them, it will now provide US access to about 3.5% of the market (Canada is likely to compensate dairy farmers);
- The US relented on its demand to eliminate the dispute settlement system on Chapter 19, a big win for Canada;
- Canada agreed to the terms of the US-Mexico deal, among them a de minimis of US$100 (the amount of imports without duties, which in NAFTA is US$20), stricter rules of origin for autos, a 10 year sunset clause with a 6 year revision and an update on several topics from labor to commerce to intellectual property; and
- The US and Canada reached an agreement to protect Canada’s autos from high auto tariffs if the US imposes them under law 232 with a quota of 2.6 million vehicles exported. The latter is similar to the “side-letter” that Mexico agreed with the US that protects 2.4 million vehicles. So far there are no exemptions from steel and aluminum tariffs.
Here’s the text of the deal itself.
What strikes me is that the most contentious ongoing U.S. Canada trade dispute issue, softwood lumber, does not seem to have been addressed. (I say “seem” because a search of the document on the ustr.gov site just brought up an error.)
The Last Refuge was quite happy about the pact:
I’m still going through the USMCA text (even speed reading, it will likely take a while); here’s the link to the AGREEMENT DETAILS. However, many people have asked about how the NAFTA loophole was being closed.
Well, the answer is exactly what it had to be – there was really no option. The U.S. now has veto authority over any trade deal made by Canada and/or Mexico with third parties. This is what Ambassador Lighthizer described as the “Third pillar”.
Last year, despite the inevitability of it, we didn’t think Canada and Mexico would agree to it. The NAFTA loophole was/is a zero-sum issue: Either Can/Mex agree to give veto authority to the U.S. –OR– President Trump had no option to exit NAFTA completely.
Well, Canada and Mexico have agreed to the former, so there’s no need for the latter.
Then they print the text of Article 32.10.
Both Canada and Mexico structured key parts of their independent trade agreements to take advantage of their unique access to the U.S. market. Mexico and Canada generate billions in economic activity through exploiting the NAFTA loophole. China, Asia (writ large), and the EU enter into trade agreements with Mexico and Canada as back-doors into the U.S. market. So long as corporations can avoid U.S. tariffs by going through Canada and Mexico they would continue to exploit this approach.
By shipping parts to Mexico and/or Canada; and by deploying satellite manufacturing and assembly facilities in Canada and/or Mexico; China, Asia and to a lesser extent EU corporations exploited a loophole. Through a process of building, assembling or manufacturing their products in Mexico/Canada those foreign corporations can skirt U.S. trade tariffs and direct U.S. trade agreements. The finished foreign products entered the U.S. under NAFTA rules.
Why deal with the U.S. when you can just deal with Mexico, and use NAFTA rules to ship your product directly into the U.S. market?
This exploitative approach, a backdoor to the U.S. market, was the primary reason for massive foreign investment in Canada and Mexico; it was also the primary reason why candidate Donald Trump, now President Donald Trump, wanted to shut down that loophole and renegotiate NAFTA.
This loophole was the primary reason for U.S. manufacturers to relocate operations to Mexico. Corporations within the U.S. Auto-Sector could enhance profits by building in Mexico or Canada using parts imported from Asia/China. The labor factor was not as big a part of the overall cost consideration as cheaper parts and imported raw materials.
If the U.S. applies the same tariffs to Canada and Mexico we apply to all trade nations, then the benefit of using Canada and Mexico -by those trade nations- is lost. Corporations will no longer have any advantage, and many are likely to just deal directly with the U.S. This is the reason for retaining the Steel and Aluminum tariffs on Canada and Mexico.
I reached out to Vance Ginn of the Texas Public Policy Foundation, who is much more of a fan of the original NAFTA than President Trump, and asked him a few questions about the new agreement:
1. How big a win for President Trump is this, if it is indeed a win?
I’m cautiously optimistic about the USMCA because even though certain industries, like producers of autos and dairy products, will likely benefit, the provisions related to the auto sector will cost Americans more for autos along with potentially reducing profitability of the auto sector as higher priced cars reduce the number consumed. People prosper from trade so the focus should be on reducing trade barriers, which the USMCA may have done but we won’t know until all details are available. Based on what we do know, it appears that there is reason to believe the original NAFTA should have remained intact.
2. What do you see as the most important provision for increasing free trade?
Most important is that there aren’t many changes to the original, beneficial NAFTA. However, the USMCA provision to ban tariffs on digital trade appears to be the most important. In addition, removing trade uncertainty is a big plus, though there is now a 60 day waiting period before it can be voted on by Congress.
3. The summaries I’ve seen don’t cover the longest-running and thorniest US/Canadian trade dispute, namely softwood lumber subsidies and tariffs. What, if anything, does the agreement do to address that dispute?
I haven’t seen anything. Mostly covers the trade dispute of dairy products. One of the things to look for when the details are revealed.
4. How applicable will the 2018 NAFTA precedent be for President Trump’s other trade disputes?
The USMCA could provide a framework to get marginal gains while protecting specific sectors, like manufacturing, comes at a cost. The takeaway shouldn’t be that tariffs are a good bargaining chip because taxes aren’t a reasonable tool to use for that purpose. Taxes should be used to only collect revenue to fund limited government spending. Instead of looking at trade deficits and fair trade rhetoric, there should be a focus on making the U.S. and states as competitive as possible in the global market by instituting sound policies while working to eliminate barriers to trade.
My own impression is that President Trump scored a solid single here thanks to his unorthodox negotiating style, and probably increased his trade negotiating leverage somewhat with other countries.
Tags: Donald Trump, Economics, NAFTA, trade, USMCA, Vance Ginn
We weren’t going to get everything we wanted. No deal is 100% perfect.
“Watch it! You’re getting blood on my application!”