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NAFTA: Deal or No Deal?

Since taking office, revising American free trade agreements has been a top priority for President Trump and his “America First”-agenda. Living up to his election promises in 2016, President Trump informed Congress in August 2017 that he would renegotiate “the worst trade deal ever signed, anywhere” – namely the North American Free Trade Agreement (NAFTA) with Canada and Mexico. September 29th is the deadline for President Trump to notify Congress if a deal has been made with all three countries and with many trade topics still unresolved, the question is whether NAFTA will still be intact after the dust have settled.

American trade policy has undergone a protectionist shift as a result of President Trump’s view that existing trade deals are non-reciprocal, unfair and a zero-sum-game. NAFTA is no exception. According to President Trump, the agreement allowed Mexico and Canada to gain market access and increase their economic growth at the expense of the US. In this line of argument, NAFTA is to be blamed for the outsourcing of manufacturing jobs to Mexico and the continued restricted access to some Canadian markets for American exporters. Since NAFTA was implemented in 1994, the American trade deficit, when imports exceed exports, has soared with Canada and Mexico, much to the anger of President Trump.

Flag of the North American Free Trade Agreement. Photo: Wikimedia Commons

On August 7th, the Trump administration announced that a bilateral deal had been made with Mexico. Although the deal was a sign of relief, many concessions were made on the Mexican side. Rules of origins, the conditions that set out the minimum national content requirement that allows a product to be exported duty-free within the free trade area, have been raised from 62,5% to 75% for automobiles. The agreement also rules that 40-50% of the car components have to be made in “high wage zones” by workers earning at least $16 an hour. Considering that the average wage for a Mexican manufacturing worker is $2,30 an hour and that it is unclear where and how big these “high wage zones” should be, the new bilateral deal supplies more market uncertainty. To add salt to the wound, the US can slap heavy tariffs on Mexico if they exceed a certain quota for automobiles, putting a straitjacket on Mexico´s car industry. In contrast, the Mexicans can’t claim many victories of their own besides convincing President Trump to drop some of his most absurd demands.

One important aspect is that Canada was excluded from the deal on August 27th. Days later, on August 31st, President Trump notified Congress that his intent was “to enter into a trade agreement with Mexico – and with Canada if it is willing, in a timely manner”. This suggests that President Trump is ready to walk out if Canada doesn’t comply with American demands and will negotiate two bilateral deals instead. Although Canada refuses to be bullied, it’s over reliance on the US as a trade partner restricts its room for manoeuvring. In fact, in the event of a no-deal scenario, Bank for International Settlements estimated that Canada’s GDP would contract the most of the three NAFTA-countries, a staggering 2,2%. In comparison, Mexico’s GDP would contract by 1,8% and the US only 0,2%.

Photo: Tiburi//Pixabay

For Canada to join the new NAFTA-agreement with the US and Mexico, they demand reassurance that Chapter 19 of the old NAFTA-agreement would remain intact. This chapter specifies the procedure of handling trade disputes through an independent judiciary panel. In future trade conflicts, Chapter 19 can be a guarantee that prevents the NAFTA-countries from deploying defensive and countervailing tariffs against one another without due process. From the American perspective, Canada would have to open up its dairy market, which with its current supply-management system prevents almost any imports of dairy, egg, and poultry products. Same argument goes for Canada’s “cultural exemptions” which hinder foreign ownership of TV- and radio-stations. Currently, the exemptions also apply to and protect all distribution of cultural creations through television, radio or print formats. On this area, clearer language regarding the exemptions’ application to online and Internet based distribution has to be incorporated into any new agreement.

The renegotiation of NAFTA shows a new trend in American trade policy in which bullying and coercion are becoming common features. This has taught Canada and Mexico the lesson of being too economically integrated and reliant on one trade partner. The two countries will, as a response, seek to limit their dependency by establishing alternative trade relations.

In addition, all three countries will feel the strain as new non-tariff barriers and other market uncertainties will force businesses into abandoning cross-border supply chains in favor of the safe but costly option of producing in America. Ensuing effects to expect are lower productivity, higher prices and a less competitive market, costs usually felt most by end consumers. It is certain to say that, regardless if NAFTA remains or not after September 29th, the final outcome will reshape the economic landscape in North America, and not for the better.

Fredrik Blix

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