Trump Isn't Seeking Free Trade, He Wants Decline Instead
The biggest roadblock to a successful renegotiation of NAFTA may be the fact that U.S. Trade Representative Robert Lightizer is not actually seeking free trade. Instead, he has made it clear that the Trump administration is prepared to risk forfeiting overall economic gains in pursuit of balanced trade, in the name of an abstract view of sovereignty.
When the USTR meets with his Mexican and Canadian counterparts on Wednesday, Lighthizer will be pursuing an agenda under which NAFTA’s dispute-settlement mechanism would be diluted, government procurement contracts would be restricted, autos would have to include at least 50 percent U.S. content, and a five-year “sunset clause” would ensure an easy escape hatch should domestic job numbers not meet the desire of top-down planners, according to reports.
That isn’t free trade, it’s managed trade. Lighthizer’s demands demonstrate he is not seeking open markets to foster growth, but an ironclad guarantee of balanced results. Rather than the opportunity for competition, the goal is the virtual assurance of minimum domestic production levels. Rather than allowing unfettered competition to produce the best results for American consumers, the Trump Administration’s mercantilist approach would hold them hostage in a fanciful bid to cling to jobs. They are saying, in effect: If you want access to the U.S market, guarantee a minimum amount of production. That isn’t trading freely, it’s demanding a ransom – for captive consumers. But guaranteeing a fixed share of a market doesn’t enhance domestic companies’ ability to compete. At best, it gives them a security blanket to hang on to.
The most emotion-laden argument for this approach is a commitment to protecting U.S. national sovereignty, a goal Lighthizer specified a few months ago and sources in his office have reiterated. Sovereignty is, of course, an important principle for any nation. But playing that card in the midst of trade negotiations is more often than not an attempt to stack the deck against free trade.
Every trade negotiation is a series of trade-offs between enhanced market access and preservation of national sovereignty. Any trade agreement entails some voluntary reduction in sovereignty. When entering into a trade agreement, countries are saying, in effect: We agree not to do certain things we are otherwise entitled to do, such as impose tariffs or non-tariff barriers. In return, the other parties match the offer, or put some other form of comparable access to their market on the table. In effect, all negotiating countries are pooling some of their sovereignty. If Lighthizer is unwilling to bargain for free trade, what is he doing at the free trade bargaining table?
The USTR seems to be pursuing NAFTA negotiations as though trade is a win-lose game. The Wall Street Journal last week quoted sources as saying it was the USTR’s objective to “make it as expensive as possible” for auto companies to produce in Mexico. But trying to clamp down on auto companies that produce content in the other NAFTA countries would harm Michigan as much as Mexico. The 1930s demonstrated that beggar-thy-neighbor policies lead to beggar-thyself results.
Waiving the sovereignty flag to back demands for managed trade may seem emotionally satisfying, but is it economically beneficial? Consider the demand fornew national rules of origin for autos and auto parts, a stiff requirement for 50 percent U.S domestic content, as the WSJ reported. Currently, autos are only required to include 62.5 percent of their content from all three NAFTA countries to qualify for tariff-free access.
Lighthizer’s proposed new, national rule of origin fits the definition of balanced trade, but it would rip apart current NAFTA-based supply chains. That would hurt everyone, because supply chains have helped drive up North American vehicle exports 10 percent per annum over the past decade. North America now accounts for roughly 22 percent of global auto industry exports, up from less than 19 percent a decade ago. This increased efficiency and market share have come largely because U.S auto companies are free to extend production lines across the Canadian border into Windsor and Oshawa, and across the Rio Grande into Silao and San Luis Potosi.
Regional supply chains across national borders are not unique to North America, and U.S. auto companies are not the only ones who engage in them. Japanese companies like Nissan, Honda and Mitsubishi have a similar relationship with producers in Thailand, a connection that increased significantly about 15 years ago after the Thai government dropped local content requirements. Volkswagon has a similar relationship with Central European countries like Poland and the Czech Republic. Largely in response to price pressures from low-wage countries like Spain, VW production levels in Central Europe quadrupled between 1992 and 2005.
If national content rules of origin make it impractical to maintain North American supply chains, auto companies could simply offshore their production and pay the duty of between 2.5 percent and 25 percent – a cost that would ultimately be borne by American consumers. Or U.S. auto companies could invest even more in robotics. Either way, Mexican workers’ loss would not be American workers’ gain.
The U.S. auto industry is more productive than ever largely because of North America-wide supply chain integration, similar to other major auto-producing countries like Japan and Germany. The goal of sovereignty does not require sacrificing that achievement.
