US' NAFTA demands: the moronic and the simply misguided

US' NAFTA demands: the moronic and the simply misguided
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The epithet “moron” has recently entered the U.S. political lexicon. Here, the purely personal will be avoided in favor of the more impersonal “moronic” to describe a number of U.S. demands in the ongoing negotiations to update the North American Free Trade Agreement (NAFTA).

Starting at the top of this benighted list is the president’s repeated threat to terminate NAFTA, with two assumptions driving this tactic: that Mexico and Canada would be hurt more than the U.S. and that the U.S. would emerge relatively unscathed.

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Study after study tell a different story. Most recently, the economic consulting firm ImpactECON LLS estimated that the U.S. pulling out of NAFTA would cause a net loss of some 250,000 jobs over three to five years.

 

In a study sponsored by the U.S. automobile industry, the Boston Consulting Group has estimated that 50,000 jobs would be jeopardized in the auto parts industry. The U.S. agricultural sector would be even more vulnerable, as Mexico and Canada take about one-third of U.S. agricultural exports (about $38 billion in 2016).

Should NAFTA end, Mexico’s tariff rates on key agricultural products would skyrocket: 45 percent on turkeys, dairy products and potatoes; 25 percent on beef; 75 percent on corn syrup and 15 percent on wheat.

Moving on, there is the newly presented demand for a five-year “sunset clause” in the updated NAFTA. Behind this profoundly misguided idea — which would wreak havoc on business planning — is another moronic fixed belief: that trade agreements should be judged on whether they result in a more favorable U.S. trade balance — in this case, after a five-year trial.

As taught in every freshman economics class, however, a nation’s trade balance is almost entirely governed by macroeconomic policies: To wit, if you don’t save enough to pay for what you consume, you will run a trade deficit.

To change this equation, you must save more or consume less — trade agreements won’t move the needle much one way or the other.

Then, there are the U.S. protectionist proposals for raising the percentage for so-called rules of origin (these are rules dictating the percentage of NAFTA content that must be attained to qualify for NAFTA tariff breaks).

At 62.5 percent, current NAFTA rules are already the highest of any regional trade agreement. The Trump administration is demanding that they go to 85 percent, and, in an unprecedented further demand, it wants a 50-percent domestic content requirement for U.S. autos and auto parts.

Though not known as a font of free-trade thinking, the U.S. auto industry strongly opposes the administration’s proposal. It points out that in recent decades, a North American market for the automobile industry has emerged, with supply chains that crisscross national border many times.

The U.S. content requirement, as well as the much-higher 85-percent rule, would prove highly disruptive: The industry argues that it would represent a $10-billion tax on U.S. auto manufacturers.

Other protectionist demands by the U.S. include:

  • granting Mexico and Canada less-favorable terms for competing for government procurement contracts;
  • removing their special status in appealing market-closing, anti-dumping orders;
  • providing extra protection for so-called seasonal fruits and vegetables, a move that target Mexico’s lucrative U.S. winter market directly and
  • the cavalier right to opt in or out of dispute settlement proceedings.

During the fourth round of NAFTA talks, which ended Tuesday, both Canada and Mexico rejected the contentious proposals described above. One source described Mexico’s reaction as a combination of “no, no” and “hell no.”

But both countries were also determined not to walk away from the negotiations, suspecting that the United States really aimed to provoke such a reaction and place the blame for a blow-up on them.

In an opinion piece in The New York Times, former Secretary of State George Schultz and a Mexican colleague pointed out the NAFTA had “transformed North America into a global powerhouse.” The NAFTA trade agenda of the Trump administration undermines the foundations of that powerhouse.

Claude Barfield is a resident fellow at the American Enterprise Institute where his research focuses on international trade policy and science and technology policy.