A draft deal clarifies what populist trade policy means in practice

Fri Aug 31 2018
Ray Pierce (830 articles)

“IT’S a big day for trade, a big day for our country,” boasted President Donald Trump on August 27th. The cause of this jubilation was progress in renegotiating the North American Free Trade Agreement (NAFTA), a deal between America, Mexico and Canada. Enrique Peña Nieto, Mexico’s president, confirmed that Mr Trump had managed to secure a bilateral “understanding” with Mexico. According to the White House’s spin doctors, Mr Trump had kept his pledge to renegotiate NAFTA and had produced a “mutually beneficial win for North American farmers, ranchers, workers and businesses”.

The deadline for publishing a more concrete version of the deal is August 31st, when the American administration plans to notify Congress of Mr Trump’s intent to sign. The rush is to enable Mr Peña to sign before December 1st, when he will be replaced by Andrés Manuel López Obrador, a firebrand leftist. Both men are keen to have the deal wrapped up by then, Mr Peña to make it part of his legacy and Mr López Obrador so he can concentrate on his domestic policy agenda.

As The Economist went to press, negotiators were still hard at work. Most significantly, Canada was not yet on board, though its negotiators were sounding optimistic. Mr Trump has said he will go ahead without the Canadians—and apply tariffs on Canadian cars—if they resist his terms. Canada, however, may be emboldened by hostility within America to anything less than a trilateral deal, and by the domestic political payoff from standing up to Mr Trump.

But even if it collapses, this week’s tentative deal is significant. It brought into sharper focus the sorts of terms Mr Trump seeks to impose on America’s trading partners. A Trumpian trade deal, it appears, involves not only spin (as all trade deals do), but threats (far more than is usual). Compared with other trade agreements of recent years, it is an uneasy blend of sweeteners for the left and for business interests. It increases uncertainty for companies. And it manages markets with a much heavier hand.

Playing to the left, the Trump administration is touting what it says are the “strongest, fully enforceable labour standards of any trade agreement”. These will supposedly give teeth to rules that American unions complained were easy to ignore (though how, exactly, remains unclear). Provisions allowing investors to sue foreign governments will be fudged, with some sectors carved out (whether enough to please those fretting about corporate power also remains unclear). Several provisions are intended to please corporate lobbyists, among them protection for ten years for drugs known as biologics and an extension of copyright from 50 years to 75.

Mr Trump had originally said he wanted a sunset clause, with the new NAFTA expiring after five years unless all sides agreed otherwise. He has settled for less. After six years in force NAFTA will be reviewed, and terminated after ten more if all sides cannot agree to continue it. As long as the deal remains in force, further reviews will come every six years. This is supposed to prevent imbalances Mr Trump claims built up over time in the original, to America’s detriment, while giving companies notice to rearrange their affairs should a deal be impossible to make.

Automatic transmission

The Trumpian imprint is most visible in new rules of origin for cars, an industry that captured negotiators’ attentions in part because of its contribution to America’s bilateral trade deficit with Mexico. All trade deals set conditions for products to qualify for preferential treatment. Otherwise European or Japanese parts makers, say, could benefit from deals their governments never negotiated. This rewrite is striking for the extent to which existing conditions have been tightened and new ones introduced.

The Mexicans have agreed to a higher threshold for regional content in cars (up from 62.5% to 75%) and to the removal of loopholes that meant some auto parts were, in effect, exempt. A minimum share of steel and aluminium must be sourced from the region. Most unusually, a minimum share of production must be done by workers earning above $ 16 an hour.

All this is supposed to sharpen carmakers’ incentives to locate production in America. Juan Pablo Castañón, head of the Mexican Business Co-ordinating Council, says that 70% of Mexican car plants comply with the new rules for parts and metal. So the renegotiation could shift employment towards the United States, if carmakers rejig their supply chains in response or ramp up the supply of compliant vehicles there while selling non-compliant ones elsewhere. But they might simply choose instead to import more parts from outside the NAFTA region, and swallow the resulting 2.5% tariff. In any case, consumers will probably have to pay more.

The most distinctive Trumpian feature is the bullying that is being used to impose the new deal. Reports emerged on August 28th of a separate side letter that would exempt some level of Mexican car exports from any new American tariffs imposed in the name of national security. Flavio Volpe, the president of the Canadian Automotive Parts Manufacturers’ Association, an industry group, worries about how enforceable any new arrangement would be. Normally, trade agreements are self-reinforcing, with members sticking to them because they generate gains for all concerned. This one is clearly being held together with threats.

Some of these features of the new NAFTA may help sell it to American voters suspicious of conventional trade deals. It may even be better than no NAFTA at all. But the way talks have been conducted, and the gap between the promises made for it and the likely reality, have stored up problems for the future.

This article appeared in the Finance and economics section of the print edition under the headline “Wheeler dealer”
Ray Pierce

Ray Pierce

Ray Pierce is a Senior Market Analyst. He has been covering Asian stock markets for many years.