Adios, NAFTA

On March 2nd, 2018 President Donald Trump (in)famously tweeted, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”

After months of jousting with Prime Minister Trudeau and President Nieto over foreign trade, a deal was finally made at the 11th hour and the US-Mexico-Canada Agreement (USMCA) was born. The question now: is this the clear win we were promised, or is the agreement much ado about nothing?

One of the main victories touted by the Trump camp is the new access to Canada’s dairy market. However, the new rate is a meager 0.34% increase from the past rate of 3.25%, a change that Bank of America Merrill Lynch Global Economist Ethan Harris estimates will only increase U.S. dairy exports to Canada by $70 million, or 0.0003% of GDP compared to the rate under NAFTA.

A more significant change to the previous trade deal involves the new domestic manufacturing threshold the three countries’ automakers will have to clear to qualify for zero tariffs. Previously, NAFTA required 62.5% of all car content to be produced in North America. That number is now 75%.

Possibly the most substantial aspect of the USMCA is the mandate that an increasing percentage (40% by 2023) of parts for vehicles must come from “high wage” factories. To meet that designation, the factory must pay a minimum of $16 an hour in average salaries for production workers. 

It is important to note that this provision is not indexed to inflation, so it will not be as punitive as time goes on. But in the meantime, this move is expected to cause a rise in auto prices domestically.

The biggest victory for Canada is keeping NAFTA’s Chapter 19 provision in the new trade deal. Chapter 19 stipulates that when protesting new tariffs by another country involved in the deal, all three countries have equal representation on a panel designed to settle trade-related disputes.

Other ancillary conditions included in the USMCA: longer protections for American biologic drugs against competitors, a measure making it easier for Mexican workers to form labor unions, and an extension on intellectual property protections for American pharmaceutical companies selling prescription drugs in Canada.

This trade deal has some things I like and some things I don’t, but my biggest problem with the agreement is that it doesn’t address the elephant in the room. Unfortunately, the USMCA doesn’t touch any aluminum and steel tariffs the US is currently imposing. 

By agreeing to this new agreement, it is clear that Trump’s trade-motivated crusade against our neighbors has lost some momentum. Of course, the President still has China square in his crosshairs, and the two world powers remain very far apart on a trade deal. Now that Trump has settled the trade issues in his backyard, expect him to take dead aim at America’s trade deficit with China. 

After the USMCA was finalized, Deborah Elms, Executive Director at the Asian Trade Centre, stated, “He wants to tackle China. The rest is a distraction on the way to the real show. Now he is in a much better position to focus on China all day and night long.”

As it relates to the USMCA, the last-minute agreement struck by the three North American powers was much appreciated by the markets. It also strengthened the relationships with our neighbors. It is important to note that President Trump did ease tensions politically and economically by getting this deal done. Just don’t forget that arsonists make the best fire fighters.