KRWG

Examining The Replacement For NAFTA

Oct 8, 2018

Commentary: And then there were three again. On September 30, Canada and the U.S. announced that they had come to an agreement on the renegotiation of the North American Free Trade Agreement (NAFTA). On August 27, the U.S. and Mexico announced that they had come to terms on their end of the renegotiations, and it was feared that Canada would not join, thereby rendering NAFTA a two-nation agreement. The U.S. and Mexico agreed on a renewable 16-year agreement that will be reviewed in six-year increments. North American content in vehicles produced in the NAFTA region was raised from 62.5 percent to 75 percent. The agreed-upon points also include a provision that 45 percent of the content of pickup trucks and 40 percent of the content of light trucks would be built by employees earning more than $16 per hour.

Other provisions of the new agreement, that is being renamed the United States-Mexico- Canada-Agreement (USMCA), include stricter protections for intellectual property, easing the flow of digital trade, stronger protection for drug patents, and a dialogue for environmental and labor standards. 

Two major sticking points that had held Canada back from becoming a party to the new agreement were its reluctance to further open up its dairy market to U.S. producers, and its unwillingness to do away with a third-party arbitration system when NAFTA disputes arise. The Trump administration strongly wanted to do away this arbitration system and played hardball with Canada on this point.

In terms of agriculture, Canada agreed to raise the access to its dairy markets to 3.59 percent, which is a little bit higher than the 3.25 percent that was being proposed under the Trans Pacific Partnership, from which the U.S. withdrew its participation. In fact, this slightly-raised access is similar to a deal that Canada struck in its trade talks with the European Union. Canada stuck by its guns for the third-party arbitration system, and while it will be slightly modified, it will remain in place.

In commenting on the agreement, President Trump called the deal “a new dawn for the American automakers.” He also stated that USMCA will transform North America as a “manufacturing powerhouse and allow us to reclaim a supply train that has been offshore because of unfair trade agreements.” He concluded that “companies will now have an incentive to return manufacturing to the U.S.” Trump attributed the success of the renegotiations to his strategy of slapping steel and aluminum tariffs on Mexico and Canada, the status of which is still uncertain going forward.

So, what is the verdict on the new USMCA? In a nod to my favorite Clint Eastwood movie, I see the good, the bad, and the ugly. The good is the fact that the 24-year-old trade agreement needed to be updated for the digital age and changes in the energy industry, especially in Mexico. The framework of the original NAFTA agreement is preserved, even if Washington is promoting the changes as being a complete revamping.

The bad is the uncertainty whether the changes in automotive content to 75 percent and the requirement for 40 to 45 percent of truck production to be made with $16 per-hour labor will really happen. In an effort not to disrupt their supply chains, many companies will simply opt to pay an import tariff rather than shift more production to the U.S. They will tack this extra cost on to the final price of their product, which will ultimately be paid by consumers. If this occurs, it will work contrary to the intent of the Trump administration to raise the North American content in vehicles.

Several changes seem to be overblown or oversold. As to the increased access to Canada’s dairy market for U.S. producers from 3.25 to 3.59 percent, the U.S. Chamber of Commerce estimates this will increase U.S. exports to Canada by $70 million or 0.0003 percent of U.S. GDP – insignificant in the grand scheme of things. The USMCA also includes a provision preventing any partner from manipulating its currency in order to gain advantage for trade purposes – not one of the partners has been accused of doing this in the past.

The ugly is the way the North American neighbors were aggressively treated and accused by the Trump administration during the renegotiations. The agreement was tweaked, but does it come at the cost of damaged relations with our closest allies going forward? Does President Trump continue to invoke national security when justifying the imposition of tariffs on our allies? It will take time to rebuild trust among our North American trading partners, and only time will tell whether the changes will have any significant impact different from the original NAFTA. The USMCA now heads to Congress for approval.

Jerry Pacheco is Executive Director of the International Business Accelerator, a non-profit trade counseling program of the New Mexico Small Business Development Centers Network, and the President/CEO of the Border Industrial Association.  He can be reached at 575-589-2200 or jerry@nmiba.com