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Trump’s deal with Mexico: A new NAFTA?

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Commentary, Free Trade Agreements, Global Trade Daily, Imports/Exports, In The News, International Trade

Trump’s deal with Mexico: A new NAFTA?

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With the finalization of a deal between the United States and Mexico to revise the North American Free Trade Agreement (NAFTA), President Donald J. Trump’s approach to trade negotiations is about to get its biggest test yet. Can his heavy-handed tactic of threatening allies and imposing tariffs succeed in forcing other countries to revise trade rules in ways that favor the United States?

A meeting of the minds? The deal announced this week must be seen as a partial victory. Both countries demonstrated considerable flexibility—Mexico in agreeing to changes in the rules for auto production that should push some jobs back to its northern neighbor and the United States in watering down some of its most extreme demands, such as a stipulation for US content in car manufacturing and a sunset clause.

A cold shoulder for Canada? The real test will be with Canada. After watching from the sidelines as the United States and Mexico made a bilateral deal, Ottawa now faces a series of controversial demands under the threat of a Friday deadline. Trump has stated clearly that he is prepared to stick with a bilateral agreement with Mexico and leave Canada out.

The disagreements are severe. The United States and Mexico have agreed to a series of provisions that are anathema to Canada, including the elimination of special dispute settlement provisions and additional protections for brand-name drugs that Canada had refused in negotiations for the Trans-Pacific Partnership (TPP) trade pact.

If Canada is ultimately excluded, Trump’s deal with Mexico will be far more trade-disrupting than it is trade-enhancing. Auto trade, for instance, is deeply integrated across North America, and a NAFTA without Canada would force a radical reconfiguration of those supply chains.

What comes next? The other wild card is Congress. While Trump is pushing to send notification of the deal over to lawmakers quickly, any vote will wait until the new session of Congress, following November midterm elections. This means that the House of Representatives, at least, is likely to be controlled by the Democrats, and they are unlikely to do Trump any favors, especially since the deal appears to do little about the party’s concerns over labor rights in Mexico. Meanwhile, business is unhappy with other aspects of the deal, such as the weakening of investor-state dispute resolution mechanisms that protect their investments in Mexico. That could cost some Republican votes.

The best that can be said of the deal is that it is a bold step—one that indicates the Trump administration is prepared to actually negotiate new trade agreements and not just use tariffs to protect the US market. But the obstacles ahead loom large.

Trump has imposed tariffs on shipments of export cargo and import cargo in international trade.
Archives, Commentary, Global Trade Daily, Imports/Exports, International Trade

World Leaders Didn’t Take Trump at His Word on Trade

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Perhaps the world should have taken him a bit more literally. In his 2000 book, The America We Deserve, Donald Trump wrote:

What I would do if elected president would be to appoint myself US trade representative; my lawyers have checked and the president has this authority. I would take personal charge of negotiations with the Japanese, the French, the Germans. Our trading partners would have to sit across the table from Donald Trump and I guarantee you the rip-off of the United States would end.

At the meeting of the Group of Seven finance ministers—a coordinating meeting ahead of the upcoming G7 summit in Canada—US Treasury Secretary Steven Mnuchin acknowledged what has become increasingly obvious for months: Trump has done exactly that. Whatever the names of the individuals notionally holding the posts of US trade representative or commerce secretary, on trade there is only one view that matters: the president’s. Mnuchin is reported to have told his Japanese counterpart Taro Aso that when it comes to trade policy, “In all honesty, this issue, I can’t do anything about it. You have to say it directly to Trump otherwise nothing will change.”

The leaders of the G7 nations will have their chance to speak directly to Trump this weekend at the annual summit of leaders in Charlevoix, Quebec. Their message should be clear: They will work with Trump to address some of his legitimate grievances on trade, but if he refuses to take yes for an answer they will hit back as hard as they can. No more paeans to old alliances and taken-for-granted friendships. It is time for a tough, hard-minded negotiation to find a new equilibrium that allows global trade to move forward. The alternative is to blunder into an escalating and economically damaging trade conflict.

It’s time for world leaders to accept reality. One by one, all of the rosier scenarios of how a trade war would be avoided have been discarded. At first the great hope was that the “axis of adults”—Gary Cohn, Rex Tillerson, H.R. McMaster—would tame their boss’s worst impulses. All are gone now, replaced by men far less inclined or willing to stand up to Trump.

Then it was supposed to be the negotiating skill of the nominal USTR, Robert Lighthizer, who cut his teeth in the 1980s using the threat of tariffs to force concessions by a then-rising Japan. Lighthizer’s threat strategy has so far produced a standoff in the North American Free Trade Agreement (NAFTA) negotiations with Canada and Mexico, a flat refusal to bargain from the European Union, and a China strategy that has been handed off to the nominal commerce secretary, Wilbur Ross (who also came home empty-handed from last weekend’s visit to Beijing).

Then the firewall was supposed to be a courageous Congress, in which right-thinking Republican leaders who have long championed freer trade would assert congressional authority and force the president to back down. Instead, Paul Ryan, Mitch McConnell and others have set aside their principles and fallen meekly into line behind Trump.

The final brake was supposed to be the potential damage of the tariffs themselves. Surely Trump would not use trade sanctions against close allies like Mexico, Canada and Europe; surely the threat of retaliation, with its harm to manufacturers and farmers, would give him pause. Nope: Broad US tariffs on steel and aluminum imports were imposed on June 1 using the phony pretext of a national security threat. Europe, Canada and Mexico are all set to retaliate against the United States, targeting billions of dollars in agricultural exports in particular. And the Trump administration has launched a new investigation on the dubious claim that imported cars—all those Subarus and Mercedes—are imperiling the US defense base, setting the stage for the next round of tariff escalation.

What the optimists failed to recognize—despite the abundant evidence Trump has provided over decades of speeches and writings—is that the president simply believes in tariffs. He thinks that protecting US manufacturers will force companies to invest more in the world’s largest economy, the United States, creating new high-paying blue collar jobs that will more than offset any harm from retaliation against US exports or from the rising cost of imports.

His trade adviser Peter Navarro – whose convictions are the closest to Trump’s—wrote last week about the opening of a new aluminum rolling mill in Kentucky, which he attributed to Trump’s tariffs and the recent tax cuts: “There can be no better way to make America—and American manufacturing—great again than to start to rebuild those communities of America most harmed by the forces of globalization.”

It is time for the world to drop its illusions about US trade policy under Donald Trump. He is prepared, indeed eager, to ignore the global rules of trade built under US leadership for the past 75 years, to block imports from friends and adversaries alike, and to walk away from any trade agreements he dislikes.

So what is an appropriate response? Clearly, if the G-7 leaders spend this weekend lecturing Trump about alliance friendships and the virtue of stable global trade rules, they are wasting their breath. He simply does not believe in any of this.

It is better to start with the recognition that Trump has broken the system, the same way Richard Nixon did in 1971 when he abandoned the dollar’s link to gold and slapped a temporary 10 percent surcharge on all imports, including those from Canada and Mexico. Nixon’s shock led to a series of tough negotiations that resulted in Germany, Japan and other major economies boosting the value of their currencies to help bring the US trade deficit back into balance.

Similar high-level negotiations are needed now, though the circumstances are in many ways far less promising. The United States is less dominant economically than it was in 1971; US allies are less prepared to accept the legitimacy of Trump’s complaints; and the Trump team is far less competent and experienced than were Nixon’s advisers, who included Paul Volcker, Pete Peterson, Robert Hormats and Henry Kissinger.

Still, it behooves the other leaders to put forward serious proposals to address the legitimate elements of Trump’s complaints. Germany and Japan both run large trade surpluses with the United States, and should look at offering unilateral measures to boost consumption and/or open markets to help address those imbalances. Mexico could finally make serious commitments to boost wages, a long-standing and justified concern for the United States. Canada’s restrictions on dairy imports have long been an irritant in trade relations.

It is not clear, however, that Trump can take yes for an answer. On the NAFTA negotiations, for example, his administration so far has mostly refused to negotiate seriously toward an agreement, clinging to proposals that will never be acceptable to Canada and Mexico, such as the elimination of binding dispute resolution procedures and a five-year “sunset” clause that would regularly put NAFTA’s future in doubt.

If that remains the case, US allies will have little choice but to hit back and to hit back hard, targeting products that harm Trump’s electoral base. Financial markets have so far remained remarkably calm in the face of escalating trade threats; concerted pressure that temporarily triggers a Wall Street selloff could be exactly what is needed to make the president realize his trade policies come at a cost.

Neither of these approaches is easy, nor without serious political and economic risk. The most likely scenario is that other G-7 leaders will hope they can wait out Trump, containing the damage until 2020 when a new president may take office. But whatever strategy they pursue, it is time to drop the wishful thinking. On trade, Trump is doing exactly what he has long promised he would do, and the rest of the world must now find a way to live with it.

TPP would have governed shipments of export cargo and import cargo in international trade.
Commentary, Free Trade Agreements, Global Trade Daily

Trump is Right to Reconsider TPP

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President Donald Trump pulled the United States out of the Trans-Pacific Partnership on his third day in office. “A great thing for American workers,” he said, as he signed the executive order January 23, 2017, terminating US participation in a trade agreement he had called “another disaster done and pushed by special interests.”

Now, 15 months later, he has directed his top trade officials to look for a way back into the TPP. If successful, it would undo one of the worst blunders of his administration, which has not exactly been error-free. And it would reassure Japan and other US trading partners in Asia that the strategic interests of the US in the region are strong enough to overcome Trump’s impulses. In the face of an increasingly assertive China, the TPP countries have a strong stake in doing everything possible to bring the US back into the fold. But reopening the door on TPP is certain to be far harder than closing it.

Trump’s turnabout has come in the face of the escalating US trade conflict with China. China alone accounted for more than 60 percent of the $566 billion US trade deficit in 2017, and the administration is now threatening tariffs on close to $150 billion in imports from China to ratchet up pressure on Beijing to address the problem.

Trump had been advised repeatedly before taking office that TPP was an important source of leverage over China; the promise of zero tariffs and reduced regulation inside a bloc covering some 40 percent of the global economy would have been a strong magnet for multinational companies that are increasingly frustrated at the difficulties of doing business in China. Beijing would have faced the tough choice of watching investment dollars flow to other countries in the region, or launching new reforms to move China in the direction of the TPP rules.

For Trump, however, opposing TPP was one of the signature issues that brought him to office. He won the election in Rust Belt states like Pennsylvania, Ohio and Michigan by promising to rip up or reform the unpopular North American Free Trade Agreement and to pull out of the TPP, which he called “another massive international agreement that ties us up and binds us down.” He made good on that campaign promise by killing TPP before his administration had even begun to design its trade strategy toward China.

That Trump is now reconsidering that decision is certainly a good sign. He has shown some limited ability to change his views in the face of new evidence; he had promised in the campaign, for example, to name China as a “currency manipulator” but backed away after business advisers persuaded him that his concerns were a decade out of date. His second thoughts on TPP provide some hope that he is growing into his job as president.

But there are three big obstacles to the US returning to the fold. The least of these is Trump’s own unrealistic expectations. When news filtered out last week of his about-face on TPP, he quickly tweeted that the US would only return “if the deal were substantially better than the deal offered to President Obama.” That is unlikely to be the case, but the administration has already shown that the president’s reach far exceeds his grasp. Similarly tough talk on the US trade agreement with South Korea was resolved by a modest deal, and the US is backing away from its most extreme proposals in the NAFTA renegotiation with Mexico and Canada.

A bigger hurdle is the lukewarm reception from other countries. Having been burned by the US once on TPP, they will be reluctant to make the same mistake twice. It was just last month that the remaining 11 countries managed to conclude a new deal without the US, and the initial reactions from Japan, Australia and others suggest no great desire to start all over again just because Trump has changed his mind. Like him, their leaders have powerful domestic business lobbies to contend with.

The biggest hurdle, however, is back in Washington. The resignation of House Republican speaker Paul Ryan last week is the latest sign that Trump’s unpopularity at home is setting the stage for a Democratic sweep of the House of Representatives in November. That means any renegotiated TPP will have to pass a House controlled by Democrats who were hostile to TPP even when it was championed by one of their own, Barack Obama. A Trump Pacific Partnership will be even less appealing.

For all the challenges, however, the US and the TPP countries should make every effort possible to come together again. The stakes are much higher than the domestic politics of any one nation. With China’s rising strength in the region, all of its neighbors have a strong interest in a United States that is fully engaged economically as well as militarily.

The TPP remains the best hope for that engagement. While the odds are long, it is worth another try.

New NAFTA would govern North American shipments of export cargo and import cargo in international trade.
Commentary, Free Trade Agreements, Global Trade Daily, Imports/Exports, In The News, International Trade

The Real Game Trump Is Playing on NAFTA

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As the United States, Canada and Mexico head into the seventh round of the renegotiation of the North American Free Trade Agreement, there is a question increasingly looming over the talks: Why hasn’t Donald Trump pulled the plug already?

The president has made no secret of his loathing for NAFTA, calling it during the campaign “the worst trade deal in history.” He came very close to ending it nearly a year ago, in April 2017, but reportedly was talked down at the last minute by personal calls from Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto. Throughout the year, as the negotiations dragged past their original end-of-2017 deadline with no progress in sight, Trump continued to threaten withdrawal. As recently as the last round in Montreal in January, Canadian officials were telling reporters in advance that they were certain Trump was on the verge of pulling the US out of NAFTA.

And yet, even with the president’s top trade negotiator acknowledging last month after the Montreal round that the talks are “progressing very slowly,” Trump now looks increasingly unlikely to leave the table. He told the Wall Street Journal that he was “leaving it a little bit flexible,” and acknowledged that it would be hard to conclude a new NAFTA prior to Mexico’s general election on July 1. “There’s no rush,” he added. That could mean the talks will now drag on until 2019, since the new Mexican president will not even take office until December.

Is Trump getting cold feet, then, on NAFTA? That is certainly possible—pressure from pro-trade Republican members of Congress and from Republican governors from export-dependent states has been growing. Pulling out of NAFTA would generate a backlash within his own party, and would probably upset financial markets as well.

But there is another possible explanation. Whether by design or by luck, Trump is already winning the NAFTA renegotiation. It turns out the uncertainty over NAFTA’s fate is Trump’s friend. It is part of what appears to be a systematic—US trading partners might say predatory — strategy to shift investment dollars to the United States.

I have had conversations with business leaders in recent weeks in which they all quietly acknowledge the same thing: Until they know what the new rules will be under NAFTA, they are likely to hedge their bets by locating new investments in the United States rather than in Canada or Mexico, just in case the rules change and they are frozen out of the largest North American market.

The most explicit move was the decision by Fiat Chrysler last month to move production of some Ram heavy duty pickup trucks from Saltillo, Mexico, to Warren, Michigan, creating about 2,500 jobs in the US. If NAFTA disappears, or the rules for automobile content are changed significantly as the Trump administration wants, a Mexican-built Ram truck could have faced a 25 percent import duty in the United States. Moving production to Michigan takes that risk off the table. Trump has taken credit for other decisions, like Toyota’s announcement of a new $1.6 billion car plant in Huntsville, Alabama, although that decision appears to have been in the works before Trump’s election.

Trade uncertainty might not be enough on its own to shift investment flows significantly. But the administration and congressional Republicans have been piling on the sweeteners.

The Republican tax bill Trump signed into law in December cut the headline US corporate tax rate from 35 percent to 21 percent, moving the United States overnight from having the highest marginal corporate tax rate among the advanced economies to one of the lower rates. The tax bill included numerous other incentives, including immediate expensing of capital investments, which will make the United States a far more attractive location for new or expanded manufacturing plants.

The administration also has been pursuing an aggressive deregulation agenda, moving to roll back or eliminate regulations that are costly for many businesses, including elements of the Clean Power Plan, new overtime pay rules, workplace safety rules and fuel economy standards.

Perhaps most striking has been the Trump administration’s dollar policy. With occasional deviations, the United States has favored a strong dollar since at least the early years of the Reagan administration, with officials believing a strong currency was important for international financial stability and served as a bulwark against inflation. But at Davos last month, Treasury Secretary Steve Mnuchin explicitly abandoned that policy. “Obviously, a weaker dollar is good for us as it relates to trade and opportunities,” he said at a news conference aimed at pitching the United States as an attractive investment location.

The statement was indeed obvious—all other things being equal, a weaker dollar makes the United States a more competitive place to do business for globally traded goods, and should increase investment and boost exports. And the markets seem to be listening. In the year since Trump took office, the dollar has fallen more than 10 percent against the other major currencies despite interest rate increases from the Federal Reserve, which normally drive the dollar up.

All of these add up to an aggressively pro-investment set of policies. The message to business is clear: There are dangers and risks to investing outside the United States and enormous incentives to get with the administration’s program.

Trump has, in fact, been quite explicit about his intentions all along. In his major campaign speech on US trade policy in June 2016, in the once-thriving and now depopulated steel town of Monessen, Pennsylvania, he said new trade policies were only one facet of his larger goal, to “make America the best place in the world to start a business, hire workers and open a factory.”

Politically as well, uncertainty is the president’s friend. If he pulls the plug on NAFTA, he angers Republican allies and roils the markets. But if he does a deal, then he will have to pivot from being NAFTA’s biggest critic to being a cheerleader for the new agreement in Congress, which Democrats are all but certain to denounce as inadequate. A long negotiation in which he can continue to claim he is fighting for a better deal looks by far the best bet.

So what’s not to like? First, the strategy risks retaliation as Canada, Mexico and other US trading partners catch on. Already, the United States is facing a flurry of complaints over its increasingly aggressive use of antidumping and countervailing duty laws to impose new tariffs on imports. The United States turned away from these “beggar thy neighbor” policies for a reason in the 1930s — while they might generate short-run gains, in the longer run US leaders realized the country was better served by policies that enriched the United States and its trading partners.

Secondly, the administration’s own protectionist impulses could undermine the strategy. The Commerce Department earlier this month recommended significant new, across-the-board tariffs on steel and aluminum imports, resurrecting an obscure 1962 law to claim that imports are damaging the US industrial base and threatening national security. But steel is still the material of choice for automakers, and aluminum is increasingly popular. New trade restrictions that drive up domestic costs for manufacturers could more than offset the inducements the Trump administration has offered; other big losers would be construction equipment makers like Caterpillar, shipbuilders and the oil industry.

Finally, the administration will need to find an off-ramp. The NAFTA renegotiation cannot go on indefinitely; at some point the president will either have to bite the bullet and pay the political and economic cost of withdrawal, or accept some compromise deal that will be all but impossible to sell on the campaign trail if he seeks reelection. Neither option will be appealing for Trump.

But for the moment, the president has got a good game going. Expect him to keep playing it as long as he can.

Edward Alden is a senior fellow at the Council on Foreign Relations, and author of the new book Failure to Adjust: How Americans Got Left Behind in the Global Economy. This article distributed under Creative Commons license.

Trump has imposed tariffs on Chinese shipments of export cargo and import cargo in international trade.
Archives, Commentary, Global Trade Daily, Imports/Exports, In The News, International Trade

The Trump Tariffs on China: A Perilous Moment

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The Trump administration’s announcement that it will move to impose new tariffs on about $60 billion in Chinese imports is shocking, but not unexpected. The administration has been signaling for months that it was readying far more aggressive trade actions, especially against China. It has made it abundantly clear in both words and actions that the United States will no longer be handcuffed by the rules of the World Trade Organization, which forbid such unilateral sanctions. And, while allies will rightly complain about the United States’ blatant disregard for the rules, the complaints levied against China’s trading practices are significant and broadly shared.

We are now moving into uncharted territory. In the best case scenario, these actions will prove to be a healthy shock to the global trading system. China will realize that it cannot keep using the system for its narrow economic advantage, and will finally act to address the growing complaints from its trading partners and from foreign business operating in China. At the worst, however—and the worst is certainly quite possible—it will provoke a broader rupture that does serious damage to US-China relations and to the global economy.

The administration is delaying the action to solicit comments from affected US companies, and it is quite possible the final tariffs will fall short of the threats. The threatened steel and aluminum tariffs, which were set to be imposed March 23, have now been delayed for many countries. The same could be possible here.

But let’s assume President Trump is determined to move ahead and won’t be dissuaded by the huge pressure that will be brought to bear from opponents in Congress, the business community, and US allies. Having just spent the past several days in China speaking with think tank counterparts there, I have three observations.

First, the United States must lay out clearly what it seeks from China in exchange for removing the tariffs. For example, when President Richard Nixon in 1971 suddenly pulled the United States out of the Bretton Woods system of fixed exchange rates and slapped a ten percent tariff on most imports, his goal was clear—to force Japan, Germany, and other countries that were running large trade surpluses to revalue their currencies against the dollar. A negotiated settlement was quickly reached and the tariffs were removed.

But in this case, other than broad complaints about a series of longstanding Chinese practices such as intellectual property theft and forced technology transfers, the administration has not issued any clear demands. Instead it appears willing to leave the tariffs in place indefinitely. That is a recipe for a growing, damaging trade conflict in which China will have no choice but to retaliate.

Secondly, the United States and China urgently need to restart economic talks. The Trump administration, frustrated by what it justifiably sees as years of empty promises, has shut down those dialogues. China’s top economic official, Liu He, was rebuffed when he came to Washington earlier this month with proposals to restart talks. But if the two sides are not talking, there is no chance of a constructive resolution to the dispute. Premier Li Keqiang, in his press conference this week at the close of the National Peoples’ Congress in Beijing, made a series of promises to cut tariffs, protect intellectual property, prohibit forced technology transfers, and take steps to reduce the trade imbalance with the United States. The statements at least suggest that China is taking the US threats seriously.

The Trump administration may well be justified in insisting on concrete, shorter term results rather than simply new Chinese promises of economic reform. But the longer the two sides are not talking, the greater the danger of misunderstandings and damaging responses on both sides.

Finally, the administration must make it clear that what it seeks is a renewed economic relationship with China on fairer terms, not a broader conflict with China. The Trump administration has embarked on a global effort to remake its trade relationships, picking fights with Canada, Mexico, the European Union, South Korea, and others. China must be seen as just one piece in that effort.

But in China, many see the tariff threats as part of a package of hostile US moves aimed at isolating and punishing China. These include the harsh language on China in the Trump administration’s new National Security Strategy, which twinned China with Russia as “revisionist” powers challenging US interests. And China was infuriated by the little-noticed (in the United States) decision by President Trump to sign the Taiwan Travel Act, which promotes official exchanges between the United States and Taiwan and is seen by China as calling into question his promise to Chinese President Xi Jinping to respect the “one China” policy.

China is likely initially to respond in a measured way. The fact that the United States is acting alone will encourage China to consult first with other countries that have also been targeted by the Trump tariffs. And the notice and comment period will provide a bit of breathing room for cooler heads to prevail.

But it is still a perilous moment. The administration appears to be acting with clear purpose—to deliver a shock that will force a rebalancing of economic relationships with its trading partners, most importantly with China. It is vital that Trump officials communicate their goals and intentions clearly and provide a path to a resolution. Otherwise, there is a serious danger that events could spiral out of control.

Tariffs would make shipments of export cargo and import cargo in international trade more expensive.
Archives, Commentary, Global Trade Daily, Imports/Exports, In The News, International Trade

Donald Trump, Steel Tariffs, and the Costs of Chaos

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When President Nixon announced on August 15, 1971 that the United States would impose a 10-percent across-the-board tariff on imports—the most significant import restrictions since the 1930s—it followed an intense weekend of deliberations among his top officials at Camp David. Nixon’s economic brain trust spent three days carefully hammering out the details of the import restraints, and then signaled to the world that the president was prepared to lift them as soon as US trading partners allowed their currencies to rise. The tariffs were removed four months later after a negotiated agreement.

When President Trump announced March 1, 2018 that the United States would impose 25-percent tariffs on imported steel and 10-percent tariffs on aluminum—the most significant import restrictions since 1971—it followed a morning of sheer chaos in the White House. The administration had announced the night before that leading steel and aluminum makers were invited to the White House, leading to speculation that new tariffs would be announced. But in the morning White House officials backed off, with the press office saying instead that it would only be a “listening session.” And then, with the cameras rolling and his own staff apparently unprepared, President Trump announced that the tariffs would be unveiled next week and would be kept in place “for a long period of time.”

It was once said that Britain lost its empire in a fit of absent-mindedness; the United States, it now appears, could lose its own in a fit of Donald Trump’s impulsiveness.

The precise contours of the new measures are still unknown. The administration may exempt still large suppliers like Canada and Brazil, and may exclude some products, though Trump told industry officials he does not want exemptions. There will be frenetic lobbying between now and the final announcement. And the negative market reaction—the Dow Jones fell about 600 points after the announcement—could stay the president’s hand.

But the issue is not simply the economic consequences. The president’s announcement yesterday was the clearest and most disturbing sign yet that he is quite prepared to take ill-considered actions that will chip away at the foundations of the global trading system.

The problems in the steel and aluminum industries are real—global overcapacity caused primarily by Chinese state subsidies to their producers. But the proposed measures are wildly indiscriminate, and will hit many countries, among them the closest US allies and others that have played by the rules of the trading system.

The new tariffs rely on a provision of law—Section 232 of the Trade Expansion Act of 1962 which allows imports to be blocked on national security grounds—that has not been used successfully in decades. Previous administrations had interpreted the provision narrowly, requiring evidence that the military needs of the Pentagon could not be supplied by US production or by close allies like Canada. Trump’s Commerce Department threw away a half century of precedent in finding that steel imports, including from the most-trusted US allies, had caused “a weakening of our internal economy [that] may impair national security.”

Under current global trade rules, the United States will get away with it. Article XXI of the World Trade Organization (WTO) agreements states that countries are free to take actions they deem essential to their security interests. But WTO members have been cautious not to abuse that provision, recognizing the obvious danger. Now the United States—a country that has long championed the WTO system—will blow a giant loophole in the rules that other countries will eagerly walk through. China, India, Brazil and others are more than capable of inventing similar national security rationales for restricting imports.

The most encouraging thing that can be said is that, as the great Yogi Berra once put it, “it ain’t over till it’s over.” The president’s impromptu announcement will generate a huge pushback. The potential losses for the big steel-using manufacturers—including the Big Three auto companies, construction equipment firms like Caterpillar and John Deere and the construction sector more broadly—will have them all beating a path to the White House and Congress.

Trump’s more conventionally-minded aides, like National Economic Advisor Gary Cohn, may succeed in watering down the measures. The Pentagon has also warned about the “negative impact on our key allies.” Foreign governments, including the European Union and China, have said they will retaliate and target US exporters. EU Commission President Jean-Claude Juncker called the measure “blatant intervention to protect US domestic industry and not based on any national security justification.”  Important Trump allies in Congress are in revolt—Senate Finance Committee Chairman Orrin Hatch (R-UT) called the tariffs “a tax hike the American people don’t need and can’t afford.”

But even if the measures finally unveiled are more limited, great damage is being done. The United States built the architecture of the global economy in its image. The WTO was largely a US creation. Now Donald Trump, in a fit of impulsiveness, may tear it all down.

NAFTA will govern North American shipments of export cargo and import cargo in international trade.
Commentary, Free Trade Agreements, Global Trade Daily, Imports/Exports, International Trade

Renegotiating NAFTA: Let the Games Begin

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The North American Free Trade Agreement was the first in US history to slash trade barriers between a wealthy country and a much poorer one. This month, NAFTA marked another first when officials from Mexico, Canada, and the United States sat down in Washington to begin renegotiating the deal.

The two milestones are not unconnected—NAFTA was the most controversial trade deal ever negotiated by the United States, in part because of the incentives it created for companies to relocate to Mexico to take advantage of lower wages. The success or failure of the coming negotiations will largely determine whether US trade policy can find a firmer footing for the future or continue to be handcuffed by a lack of political and popular support.

Here’s the challenge in a nutshell: how to take a two-decade old agreement that President Trump has called “the worst trade deal ever negotiated,” and somehow alter it sufficiently that the president becomes its champion if and when it goes to Congress for ratification. Trump has many times called himself a great negotiator, and NAFTA will be the acid test of that boast.

Here are the four challenges that must be overcome for a successful NAFTA renegotiation:

Putting America first: Trump’s biggest objection to NAFTA is that it was a one-sided deal, pointing to the large increase in the US trade deficit with Mexico since its enactment and the loss of manufacturing jobs to Mexico. Whether the economic benefits of NAFTA to the United States have outweighed those costs—my colleagues James McBride and Mohammed Aly Sergie have a good backgrounder weighing the arguments—is beside the point. Trump needs to show that he has changed the agreement not just in ways that may benefit all three countries, but in ways that will help the United States relative to Canada and Mexico. That is a much harder task.

The “America first” issues in the US negotiating objectives include eliminating the special dispute settlement provisions under Chapter 19 of NAFTA, strengthening “Buy America” and other procurement rules that benefit American companies, and tightening so-called “rules of origin” to encourage sourcing in the United States and North America.

Each issue is fraught for different reasons. Canada will fight to its last breath to retain the Chapter 19 rules, which allow it to challenge US antidumping and countervailing duty orders before a NAFTA tribunal rather than in US courts. With the ongoing fight over softwood lumber, and a new case that could block sales of Bombardier aircraft in the United States, the issue is still a vital one for Canada. Both Canada and Mexico will object to restrictions on their access to government procurement in the United States, but may be willing to live with this concession. Rules of origin—which is largely an issue for the automotive industry—is a wild card. If they are renegotiated to require more “North American” content, then Mexico will cheer; indeed, it is the US car companies that would object. But if the Trump administration tries to introduce an “American” content requirement, this would clearly violate the spirit of the deal.

Of course, Trump could try out a more traditional “pro-America” argument for trade—that strengthening NAFTA rules for digital commerce, for intellectual property, for labor and environmental standards, would all help US companies and the workers they employ. But since the US negotiating proposals on these issues are borrowed almost entirely from the Trans-Pacific Partnership (TPP) agreement that Trump tore up on his first day in the Oval Office, this seems unlikely.

Dealing without deadlines: All three countries are saying that they want to move quickly on the renegotiation to reduce uncertainty for investors in North America. The coming Mexican election next year, which could bring the populist Andrés Manuel López Obrador to power, is seen as an especially strong motivation to get the deal done early. But modern trade negotiations are difficult and complex. The TPP took nearly a decade to negotiate. The Trans-Atlantic Trade and Investment Partnership (TTIP) with Europe was supposed to be concluded last year and has barely made it past the preliminary issues. Mexico’s economy minister Ildefonso Guajardo said last week he sees a “60 percent chance” of the deal being done by the end of the year, which is another way of saying it likely won’t happen.

The bigger problem for Trump is that Mexico and Canada have strong incentives to delay. The longer the talks drag out, the wearier the president is likely to become of the whole exercise, and the more likely he becomes to accept modest changes and try to call it victory. Or, more worrisome, it could force Trump to trigger the NAFTA withdrawal provisions that he came so close to invoking in April, which would be highly disruptive but would have the negotiating advantage of setting a hard, six-month deadline for the talks to succeed or fail.

Holding back the wolves: American business and American farmers really like NAFTA. Except the trucking industry, which wants permission for foreign drivers to “reposition” empty trucks within the United States. And the textile industry, which wants to revisit the “tariff preference levels” agreed to under NAFTA that allow for foreign fabrics to be used in some clothing. And the California wine industry, which objects to the special treatment given to domestic wines in Canadian retail outlets. And the dairy industry, which has long chafed at Canada’s protectionist regime for milk and cheese.

In the testimony in June to the International Trade Commission, US companies that were by and large supportive of NAFTA nonetheless raised dozens of issues they would like to see addressed in the negotiations. But the more issues that are thrown on to the negotiating table, the more difficult it will be to reach a deal in any sort of timely fashion. To get the agreement done, the Trump administration is going to have to get very good at saying no to a host of special interests, each of whom comes armed with influential political allies in Congress.

Dealing with Democrats: Many congressional Democrats, who were frustrated with President Obama’s embrace of the TPP and Hillary Clinton’s lukewarm rejection of the deal, have been chomping at the bit to re-establish themselves as the anti-NAFTA, trade-skeptic party. Senate Democratic leader Charles Schumer (D-NY) earlier this month released the party’s “better deal” agenda, which tries to out-Trump Trump in its criticisms of US trade deals.

It can be said with confidence that whatever deal Trump can extract from Canada and Mexico will immediately be denounced as a sell-out and a give-away by the congressional Democrats. That will put the president is a position he would surely prefer to avoid—arguing the merits of NAFTA against vociferous opposition from Democrats, and needing pro-trade Republicans like Speaker Paul Ryan (R-WI) and House Ways and Means Committee Chairman Kevin Brady (R-TX) to carry the load for him in Congress.

NAFTA was the beginning of an era, the first great experiment in freeing trade between high wage and low-wage countries. It set the basic template for many deals that followed, including the CAFTA with Central America and the Dominican Republic, and China’s entry into the World Trade Organization. None of those deals has become more popular with age.

A successful renegotiation of NAFTA would be another milestone, demonstrating such deals can be living agreements that can be updated, improved, and continue to work in the interests of both wealthier and poorer countries. A failure, however, would continue to erode the already fading public confidence in trade.

Edward Alden is the Bernard L. Schwartz Senior Fellow at the Council on Foreign Relations. This work is licensed under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) License.