Is Trump Mainly Rebranding NAFTA?
The economic impact—and political future—of the '94 trade deal's successor is utterly unclear.
After more than a year of bitter negotiations, U.S. President Donald Trump secured an eleventh-hour makeover of the trade deal with Canada and Mexico he’s often called the worst in history. But it’s far from clear that the revised pact will revitalize manufacturing, or whether it’s mainly a rebranding of NAFTA—or that Congress will hand Trump the win on trade he is desperately seeking.
The revised deal offers some updates and improvements on the original North American Free Trade Agreement, tweaks that are largely similar to those included in the big Pacific trade deal inked by former President Barack Obama and nixed by Trump his first week in office. But the awkwardly named “United States-Mexico-Canada Agreement” also includes several new provisions, especially regarding auto manufacturing, that could ramp up trade tensions between the United States and its biggest trading partners.
This is “the biggest trade deal in the United States’ history,” Trump erroneously said from the White House Rose Garden Monday morning, celebrating the last-minute conclusion of three-way talks that will salvage a $1.2 trillion free trade bloc that has been under threat since his election. (The Trans-Pacific Partnership (TPP) Trump killed included the NAFTA countries plus nine others.)
“Once approved by Congress, this new deal will be the most modern, up-to-date, and balanced trade agreement” the United States has ever concluded, Trump said.
As he did in touting minor revisions to the existing free trade agreement with South Korea, Trump presented his updated NAFTA as a “brand new deal,” though it retains the vast majority of the trade conditions in the original pact. What is certain is that it will have a new name. Despite the deal’s huge similarities to the quarter-century-old agreement that he has spent years vilifying, Trump insisted the agreement be called the “USMCA.” (“Has a good ring to it,” he said.)
“His approach to trade is all about images and symbols, and has relatively little trade analysis,” said Phil Levy, a trade expert at the Chicago Council on Global Affairs.
After months of acrimonious talks, especially with Canada, all sides gave a little in the final deal. U.S. negotiators cheered incrementally greater access to the heavily protected Canadian dairy market, while Canada managed to preserve some politically sensitive provisions regarding trade disputes.
In addition, the revised pact will now cover issues such as digital trade and intellectual property protection that were in their infancy when the original agreement was drafted. The new deal also has tougher labor and environmental protections than the original accord. Together, those changes were long sought by business and big labor and go some way toward bringing the trade deal into the 21st century.
The enforceable labor standards are “a huge change,” said Antonio Ortiz-Mena, a former Mexican trade negotiator now at Stonebridge Albright. Canada and Mexico’s desire for stronger dispute settlement systems may have “saved the U.S. from itself, and increased the odds of ratification,” he said.
By and large, what’s new in the revised NAFTA is almost identical to the provisions in the doomed TPP that the Obama administration spent five years negotiating, which faced an uphill fight in Congress before Trump pulled out of the deal.
One puzzling aspect of the final agreement is that the United States will continue to slap tariffs on Canadian and Mexican steel and aluminum—even though the Trump administration said those tariffs were meant to pressure both countries into reaching a comprehensive agreement. That raises questions about the underlying strategy behind the administration’s expansive use of tariffs even as it says it wants to lower trade barriers around the world.
“Canada and Mexico did exactly what we said we wanted them to do” but got no relief, said Tori Whiting of the Heritage Foundation. “It goes to show that we’re not really sure what the strategy is with all these tariffs. First it was about national security, then it was a negotiating tactic, and they’re still not gone. I’m not sure what the point is,” she said. Trump, for his part, says his tariffs have forced negotiating partners to the table and helped revitalize some U.S. industries, such as steel.
The continued tariffs could be a political liability in both countries, said Ortiz-Mena. “I don’t see Mexico and Canada signing the agreement with those tariffs still in force–politically, it doesn’t fly,” he said.
Additional tariffs loom large over one of the biggest—and potentially riskiest—changes to NAFTA, regarding the auto sector. To boost domestic manufacturing, the new agreement mandates that more automotive content be produced in North America and that a big chunk of Mexican auto production be done by workers paid a decent wage. Trump said the new provisions are meant to bring back auto factory jobs he says were decimated by the original NAFTA.
“This will be a new dawn for the American auto industry,” he said, and it will “allow us to reclaim a supply chain that has been offshored to the world.”
But there could be a big problem with the revised pact’s efforts to revitalize U.S. automakers, the main selling point for the new accord in the U.S. Rust Belt. Automakers can restructure their factories to build more components in North America to comply with the new conditions—or they can simply keep making components in lower-cost countries and pay a tiny tariff to bring their goods to North America.
The only way to put teeth into the revised NAFTA’s auto rules is to levy huge tariffs on cars and car parts from other countries, threatening a $300 billion-plus industry. The Trump administration is currently investigating whether to levy a 25 percent tariff on foreign cars in the name of national security.
The president previously threatened Canada and Mexico with the tariff if they didn’t make concessions on NAFTA, but both countries won exemptions from auto tariffs as part of the new trade deal. He has also shelved for now threats of auto tariffs against Japan and the European Union in the hopes of starting bilateral trade talks.
“If you carve out Japan, the EU, Mexico, and Canada, then you’ve pretty much undone the threat of auto tariffs,” Levy said. “But if you don’t have the tariffs, then the new rules-of-origin in the revised accord are meaningless. Something in here is not adding up.”
Another potential weak spot for the new NAFTA is an expiration date. U.S. negotiators initially wanted the trade deal to automatically die after five years unless all three countries agreed to renew it, which would have sown chaos through business planning. In the end, the three countries agreed it will last at least 16 years and be reviewed every six years. That offers the chance to update and rebalance the pact over time—but could also introduce a layer of uncertainty for businesses trying to plan long-term investments.
Labor organizations that led the charge against the TPP have also indicated some initial concerns.
The head of the biggest labor federation, the AFL-CIO, said in a statement “we still don’t know whether this new deal will reverse the outsourcing incentives present in the original NAFTA.” And a just-completed labor assessment of the U.S. agreement with Mexico raised concerns about that country’s ability to make meaningful reforms to labor law and U.S. ability to enforce tougher labor standards. Under the terms of the revised pact, Mexico must pass sweeping new labor legislation by Jan. 1, 2019, leaving the incoming Mexican administration little time to wrestle with thorny political issues.
Labor’s attitude toward the new deal will be crucial for its acid test, passage through Congress, with at least one chamber likely to be in the hands of Democrats after the midterm elections next month. House Democratic leaders vowed to scrutinize the new accord to see if it offers strong labor and environmental protections.
“The bar for supporting a new NAFTA will be high,” said Democratic Rep. Richard Neal, the ranking member on the House Ways and Means Committee.
Sen. Sherrod Brown, a key Democratic voice on trade who is generally supportive of the Trump administration’s trade policies, said he will have to make sure the new pact addresses job losses in the manufacturing sector. Without vocal support from organized labor, congressional democrats would be unlikely to give Trump a big win on trade, Levy said.
In the end, pending Congress’s final decision, preserving and improving a three-way trade pact was a key objective of Canada, Mexico, most of the U.S. Congress, and the business communities in all three countries.
But experts say there was a lot of unnecessary drama, brinkmanship, and damaged diplomatic relations for what finally emerged.
“Are we up or are we down? In late 2016, we had a trade deal that had most of this stuff, and we didn’t have any of the tariffs or distortions,” Levy said. But the final deal is less draconian and restrictive than what U.S. trade negotiators initially set out to achieve, he said, meaning “it could have been worse.”
“How much credit goes to Trump for putting out fires he himself set?”
This article was updated late Monday, Oct. 1, 2018.