Leave It to Trump to Negotiate a Deal That Leads to Less Trade
The United States, Canada, and Mexico have completed their renegotiation of the North American Free Trade Agreement (NAFTA). Being nothing, if not creative, negotiators named this revamp the “United States-Mexico-Canada Agreement on Trade,” or USMCA for short. While the namers get an F for imagination and creativity, they receive an A for self-evaluation skills, as they aptly removed the term “free trade” from the title. The USMCA does not advance free trade in the world.
There are more than a few labor and manufacturing provisions in this bill that will, no doubt, lead to higher prices for American consumers. There is a sourcing requirement, which mandates that 75 percent of automobile parts be produced in North America, otherwise that automobile cannot enter duty-free. Not only are the costs of auto parts already rising due to President Trump’s trade dispute with China, they will now rise even further due to the requirement that manufacturers use more expensive domestic parts that could have been imported more cheaply.
It is also quite rich that President Trump champions this deal as putting American companies first. By cutting American automakers off from their supply chains abroad, it will make them less competitive than their foreign counterparts. As with all protectionist measures, the auto sourcing provision enriches one industry at the expense of another. In this case, automakers suffer so that other domestic industries that provide material and supplies for their parts may prosper.
On the labor side, the agreement requires that 40 to 45 percent of auto content must be produced by workers who make at least $16 an hour. Even in hard left-wing circles, the most bold ask is a $15 minimum wage. Yet, here we have a Republican President, and his Republican allies in Congress, ignoring that wage requirements warp the market and drive up the prices of good and services. This hypocrisy would be stunning if it hadn’t become so painfully predictable.
On the agricultural side, there were some decent victories. The administration was able to get the Canadians to back off of some of their protectionist stances regarding their dairy industry. This will lead to better competition, and U.S. dairy products will now be a viable, affordable option for Canadian consumers. This is the essence of free trade. Allow goods across different markets to compete. Canadian products will either have to provide better quality or better prices for their customers, or be driven out of business by superior offers.
However, the Trump administration failed to look in the mirror and apply this standard across all agricultural commodities. The U.S. places dramatic, Soviet-style protections on its domestic sugar industry. Raw sugar costs 84 percent more in the U.S. than it does in the rest of the world, and refined sugar costs more than twice as much here as it does abroad. This is accomplished through import quotas, tariffs, and other artificial price supports. Negotiators should have applied the same logic to the U.S. sugar industry as it did to the Canadian dairy industry, in order to promote better competition for U.S. consumers and businesses.
Perhaps one of the most concerning provisions of the deal, however, is one that essentially bars the three nations from negotiating a free trade agreement with a “non-market country.” A non-market country is one deemed to have an economy that does not operate by market principles. Only about a dozen countries officially meet that definition. Unfortunately, China is one of them. Under the new agreement, if one of the three nations starts negotiating a free trade agreement with China, the other two nations can exit the agreement, and enter into a bilateral agreement without the third one.
Given China’s production and its importance to the world economy, this is an absolutely devastating blow to the world economy, and an exceptionally dumb idea. Another non-market country is Viet Nam, which throws the prospect of a multilateral deal like the Trans-Pacific Partnership into flux. Leave it to the Trump administration to negotiate a trade deal that discourages trade.
This Trump administration that now demands its North American counterparts not enter into free trade agreements with certain other countries is the very same that declared just last year to a gathering of foreign leaders, “We are not here to lecture. We are not here to tell other people how to live, what to do, who to be... Instead, we are here to offer partnership, based on shared interests and values.”
It is also the same one that just last week at the United Nations proclaimed, “America will always choose independence and cooperation over global governance, control, and domination. I honor the right of every nation in this room to pursue its own customs, beliefs, and traditions. The United States will not tell you how to live or work or worship. We only ask that you honor our sovereignty in return.” It would seem President Trump has forgotten his promise to respect the sovereignty of other nations, and to allow them to pursue their own interests.
In negotiating trade agreements, leaders of all nations should seek to promote competition, reciprocity, and open markets. The U.S., Canada, and Mexico had an opportunity to set the standard for free trade and to give a boost to the world economy. The USMCA is a miserable failure in that regard, and is a step back, not a step forward.