NAFTA

Trump has turned on longtime allies, labeling them a national security threat in order to levy 25 percent tariffs on steel and 10 percent on aluminum. For neighboring Mexico, this will affect some $3 billion in exports. While not insignificant, it is just a speck of the $300 billion-plus the nation sends north each year (for Canada, steel and aluminum comprise $11.5 billion of more than $300 billion in U.S.-bound trade). Yet the size of the tariffs belies their true import. They officially bury the already dying NAFTA renegotiation. They threaten the integrated industries that send basic inputs back and forth across the border, hurting manufacturers, workers, and consumers alike. And more broadly, notwithstanding the president’s repeated claims, they demonstrate that trade wars aren’t easy to win. Take Mexico, which responded to the tariffs with its own counter-salvo. While many observers anticipated a fight with the EU, fewer expected it from Mexico. The nation is utterly reliant on the United States. As one of the world's most commercially open countries, Mexico has turned trade into its main economic motor. And of the $400 billion Mexico exports each year, eight out of ten cents head north. Among Trump’s ever-growing number of combative trade fronts, Mexico might therefore stand out as the most likely to fold. But Mexico is prepared for this fight. As Economy Minister Ildefonso Guajardo declared after the tariffs were announced, "we always said that we were going to be ready to react." It immediately announced punitive measures. Certain types of steel made the list; so did lamps, cheese, pork, apples, grapes, and cranberries. This menagerie wasn’t haphazard. Instead, it was designed to gain both economic justice and political leverage, targeting key congressional districts and Trump supporters. Mexico has been down this road before, during a decade-long battle over cross-border trucking. NAFTA promised, alongside goods and services, to open up transportation markets: After a phase-in period, Mexican and American truckers were supposed to be able to take their loads straight from the factories to their final customers on the other side of the border. Yet the U.S. government continued to block Mexico’s rigs on safety fears and more than a little pressure from the Teamsters. After years of cajoling, after the creation and then cancellation of pilot programs, Mexico in 2009 finally invoked retaliatory tariffs to the tune of $2.4 billion a year. Nearly 100 products, ranging from Oregon Christmas trees, Wisconsin paper and Washington pears to New York jewelry, Florida orange juice and Idaho potatoes, were hit with levies of five to twenty-five percent. As the tariffs rose, so too did the constituent phone calls to influential representatives and senators of both parties. Two years later, the Obama administration developed a new pilot program to allow vetted trucking companies and their drivers to cross the border, and the tariffs ended. As a trade tit-for-tat begins anew, the Mexican government is deploying the same strategy. This time it isn’t alone. Several U.S. manufacturers along now well-developed supply chains are supporting their neighbor. Canada and the EU are joined in the fight, and their initial lists look notably similar to Mexico’s initial trucking foray, penalizing cosmetics, manicure and pedicure products, felt tip pens, toilet paper, and hair products among dozens of others items produced in targeted congressional districts of influential House members. At home, these steps are proving popular. Despite being in the middle of a heated and ugly election season, all the candidates support the Mexican Commerce Department’s moves. President Enrique Pena Nieto looks to gain at least his citizen’s sympathy, if not their political approval, from his stance. The nation’s business community also has the government’s back. Granted, Mexico was careful to not put tariffs on the types of steel used in the auto industry, and domestic dairy producers may even benefit. But overall a mix of patriotism and justified indignation has overridden anxieties among Mexico’s manufacturers. This stands in stark contrast to the United States. The U.S. Chamber of Commerce condemned Trump's tariff move, and agricultural interests announced the tariffs will “take American farm operations to the breaking point.” No one knows yet where this skirmish will lead. Despite its initial bravado, Mexico will suffer, particularly if the U.S. ups the ante with further tariffs or threats to NAFTA. The nation is also facing a political transition that could have its own severe economic repercussions. But the initial round already shows that there are no easy trade war wins, and that the U.S. government would be wise not to underestimate the weapons of the seemingly weak. View article originally published on Bloomberg. View article in Spanish on El Financiero.

Elections in Mexico and the U.S. could spell doom for any new agreement.

He isn’t negotiating. He’s stalling for time.

The next few weeks could be the most consequential for global trade since the final negotiations in December of 1993 that led to the creation of the World Trade Organization (WTO). Depending on the outcome, the United States and the world could begin the serious work needed to find new trade arrangements that acknowledge the relative waning of U.S. economic power and the rise of the rest. Or this month could mark the unraveling of the rules that have shaped global commerce for the past quarter century. Two events are central—the critical sixth round of the renegotiations of the North American Free Trade Agreement (NAFTA) with Canada and Mexico, which begins in Montreal on January 23; and the expected announcement of a series of U.S. trade actions targeted at China, which could be unveiled during or prior to President Trump’s first State of the Union address on January 30. We should know shortly whether the Trump administration intends to pursue a unilateral approach that will end in disappointment and failure, or will seek common ground with trading partners to address very real challenges. The two issues, NAFTA and China, have a common hook for the Trump administration—both are seen as “unbalanced” trade relationships that have harmed the economic interests of the United States (a third, the renegotiation of the U.S.-South Korea trade agreement, or KORUS, starts from the same premise). U.S. Trade Representative Robert Lighthizer has been explicit that the goal of the NAFTA talks is to negotiate a “rebalanced” agreement that will do more to favor the United States. President Trump last week told Chinese President Xi Jinping that the large U.S. trade deficit with China is “not sustainable.” It is easy to deride the administration’s narrow focus on bilateral trade deficits, and the facile notion that new trade rules alone can do much of anything about the problem. But it is much harder to reject the central premise—that large and growing imports of manufactured goods from China, Mexico, South Korea and elsewhere took a serious toll on U.S. manufacturing output and employment in the 2000s. A new paper by Susan Houseman of the Upjohn Institute argues that U.S. manufacturing took a much bigger hit than is widely understood, and that trade competition (not automation) was the primary culprit. Creating more balanced outcomes depends mostly on U.S. domestic policies—support for innovation, new investments in infrastructure, educating and training the workforce of the future. The recent cut to U.S. corporate taxes will likely help to attract new investment in the United States. But trade rules also matter, and the administration should be applauded for its focus on ensuring that U.S. manufacturers are in no way disadvantaged in global markets. The next several weeks will be critical in translating that theory into concrete outcomes. On NAFTA, the Trump administration’s approach so far has been brutally direct—demanding a series of changes to rules for auto trade, government procurement and settlement of disputes that are overtly designed to shift production from Canada and Mexico to the United States. As opening gambits, the proposals may have had a useful “shock and awe” component. But the administration must demonstrate this week that it is prepared to negotiate towards a sensible middle ground in which all three countries can declare some measure of victory. On China, the administration enjoys strong support from a U.S. business community that is growing increasingly frustrated with China’s heavy-handed treatment of U.S. investors. But that support will wane quickly if the administration announces a series of unilateral sanctions that clearly violate U.S. WTO obligations. The administration seems unfortunately captured by the president’s own nostalgia for the #MAGA era when U.S. economic power was such that it could throw its weight around unilaterally and other countries had no choice but to cooperate. That nostalgia was captured in the astonishing statement by the U.S. Trade Representative’s office Friday that the United States had “erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime.” That statement is simply a willful misreading of the history; anyone who followed the long and difficult negotiations that led to China’s WTO accession knows that the United States drove a hard bargain. And there was simply no plausible way to keep a country as large and economically significant as China outside of the WTO. The failures came later in the lack of follow-up action by both Republican and Democratic presidents. At this critical juncture, White House officials are offering some encouraging words. A senior official told reporters Friday that the United States wants “a good outcome on NAFTA and KORUS,” and wants to see “serious reform” in the WTO to deal with the rise of China in particular. Both are indeed badly needed. But the United States will only get there if the Trump administration sheds its love for the symbolism of tough, unilateral actions, and finds ways to work with allies—Canada, Mexico, Japan, the European Union, South Korea and others—on sensible, mutually supported reforms to trade rules. The administration is right—this is a new era in which more balanced arrangements and outcomes are necessary. But the United States needs the help of its friends to get there.