Commentary: So many aspects of international trade were in the news during the past 12 months. As we close the books on 2018, let’s take some time to reflect on key issues and speculate what might happen in 2019. The renegotiation of the North American Free Trade Agreement (NAFTA) by the U.S., Canada, and Mexico was probably the biggest trade story of the year. While the renegotiated NAFTA does have new provisions, such as increased North American content requirement for autos and newly installed provisions for digital trade and energy, NAFTA 2 is fairly similar to the original NAFTA agreement implemented in 1994. However, the fact that all three North American partners came to an agreement without the Trump administration carrying out its threat to pull out of NAFTA was a win in and of itself. The uncertainty caused by whether the agreement would remain in place caused many companies to postpone new investments and new hires. NAFTA 2 is still not out of the woods and will need to be ratified by Congress. The situation is being complicated further by President Trump threatening to tear up the original NAFTA agreement to put pressure on House Democrats to quickly approve the renegotiated NAFTA.
Trade wars are the other big story of 2018, particularly the billions of dollars of tariffs that the Trump administration has imposed on China, which that country reciprocated on the U.S. A temporary truce in the escalation of tariffs is currently in place, but there is no guarantee that the trade war will not escalate further in 2019. While the U.S. does import more from China that it exports to that country, China holds leverage in the sense that it can start restricting the operations of U.S. multinational firms within its borders. This would put a severe pinch on their success and put their investments in jeopardy. Hopefully, cooler heads will prevail, and both countries can negotiate through their trade differences without unduly hurting the private sector.
One specific U.S. sector that has suffered due to steel and aluminum import tariffs imposed on China, Mexico, and Canada is the U.S. steel industry itself - not the steel producers, but the metal fabricators. Tariffs slapped on metal imports from these countries has left many U.S companies struggling to deal with higher costs, and fending off competitors from other nations that could not previously compete in their markets, and who now find themselves suddenly in the game. Despite NAFTA being renegotiated, the U.S. has not rescinded the tariffs on Mexican and Canadian steel and aluminum imports. This issue will need to be addressed in 2019.
Another U.S. sector affected by the trade wars with China is the agricultural sector. A huge portion of the soybeans, corn, pork, and other items that are grown in the U.S. Heartland are exported to Chinese food producers. China has retaliated against U.S. tariffs on its exports by hitting U.S. agricultural imports. This is not only a financial retaliation, but a political one also, as many of the U.S. producers are in red states that strongly supported Trump in the 2016 presidential election. As the tariffs drag on, farmers and ranchers will continue to feel the financial pinch on their loss of exports to China.
In spite of the tariffs and trade wars on imports, the U.S. trade deficit continues to hit record levels. This is an indication that U.S. consumers continue to have a huge appetite for cheap foreign imports, in spite of higher costs. Unfortunately, the poorer socio-economic classes in the U.S. are hurt the most by higher costs of imports, because they tend to rely more on discount stores that sell foreign imports such as Family Dollar and Dollar General, for their products.
In Europe, the United Kingdom is struggling with Brexit, its messy exit from the European Union. Prime Minister Theresa May is expending all of her political energies to try to find a graceful way to extract her country from its 45-old membership in the EU. This is proving very difficult due to the trade and political details that must be addressed and how they will affect the U.K.’s competitiveness and standing in the world. The EU is not making things easy for May, as it senses it can play hardball in the negotiations.
Closer to home, Mexican President Andres Manuel Lopez Obrador (AMLO) is quickly implementing portions of his campaign platform, the first is addressing Mexico’s minimum wage. On December 18, AMLO announced an increase in the minimum wage from $88.36 pesos per day (US$4.40) to $102.68 pesos per day (US$5.11). These new rates will become effective on January 1, 2019. This is welcome news for many Mexicans who struggle on a daily basis to provide for themselves and their families. How this will affect inflation is still unknown, but it does put AMLO in good stead with his base, which has many of the poorer sectors of the country represented.
I wish everybody a happy and prosperous 2019!