U.S. stands alone as NAFTA talks resume
Washington — In the eyes of many trade observers, President Donald Trump’s “America First” slogan has become “America Alone.”
The president has followed through on campaign pledges to withdraw from controversial trade deals like the Trans-Pacific Partnership. And he has made strident demands in talks with Canada and Mexico over tweaks to the North American Free Trade Agreement that appear to have imperiled the entire deal.
The remaining 11 countries that were part of the TPP — including Canada and Mexico, as well as Japan — have taken steps toward the formation of a U.S.-less agreement. That could strengthen Canada and Mexico’s hand in the next round of NAFTA talks, scheduled to begin Friday in Mexico City, because it shows other countries are still interested in forging global trade deals without the United States.
“Clearly there is a bargaining chip with the U.S.,” said Linda Lim, professor emeritus of strategy at the University of Michigan’s Ross School of Business. “Before this, everyone thought they had a weak hand, which they did relative to the U.S.”
Lim said the Trump administration has expressed a preference for bilateral deals where the U.S. has a big size advantage when it comes to economic factors like market size, but she questioned whether they will actually pursue any of them.
“The Trump administration prefers bilateral deals because they think they have more power because every else is smaller than us,” she said. “Business doesn’t like them because they are cumbersome. I don’t think they have the negotiating capacity to negotiate a bunch of bilateral deals. The bullying part of it gives everybody else incentive to be part of bigger deals.”
Lim said the possibility of the NAFTA talks falling apart and the TPP moving forward without the U.S. means there would be “a whole bunch of large regional entities, all of which exclude the U.S.” She noted that China also sought to form a Regional Comprehensive Economic Partnership with other nations that are members of the Association of Southeast Asian Nations, including Japan, India and South Korea.
“If NAFTA disappears, it’s even worse,” Lim said. “You might end up with a de facto isolation that you didn’t start out wanting. If everyone else is having better terms, but with each other, you end up worse off.”
In NAFTA talks thus far, U.S. negotiators proposed increasing the minimum percentage of parts that must be made in the U.S., Canada or Mexico — from 62.5 percent to 85 percent — in order to escape tariffs when imported to this country. And they want to require that 50 percent of parts must come from the U.S.
Canada and Mexico has thus far rejected what they see as hardline proposals from the U.S., and they have pushed the time frame for resolving differences into 2018.
Alan Deardorff, professor of public policy and economics at the University of Michigan, agreed that the likelihood of the TPP moving forward without the U.S. changes the dynamics of the NAFTA talks as they resume in Mexico.
“The better you can improve your outside options, in a negotiation or sale, the better options you have,” he said. “This does seem to improve their outside options. How much remains to be seen.”
Renegotiating NAFTA was a central tenet of Trump’s campaign as he promised voters to bring back jobs, especially in auto-dependent states in the Midwest. NAFTA was enacted in 1994 to create a free-trade zone between the U.S., Mexico and Canada.
On the campaign trail, Trump said he would end the trade pact with Canada and Mexico and slap a 10 percent to 35 percent tariff on vehicles and parts made in Mexico that are imported into the U.S. if NAFTA renegotiation is not a success. That could add $5,000 to $15,000 to the price of a car. Some vehicles made by domestic manufacturers that are assembled in Canada or Mexico could be hit with import tariffs.
Michelle Krebs, senior analyst for Autotrader, said U.S. automakers are rightly concerned about the fate of NAFTA because they are operating in a global market.
“We live in a global auto industry,” she said. “Global automakers are looking for economies of scale. They obviously want to be a major player in China because it’s the biggest market in the world, but the U.S. is also important because North America is the second largest.”
Economic forecasters at the University of Michigan have said that it is unlikely that the U.S. will withdraw completely from NAFTA, but they said Michigan’s economy can withstand the hit if the Trump administration does decide to pull the plug on the trade deal.
The forecasters estimated that Michigan would gain 6,400 jobs by 2020 in a “soft withdrawal” from NAFTA, where Mexico and the U.S. do not place additional tariffs on each others’ exports, due to an increase in domestic light truck production. The economists said a “hard” withdrawal, where the countries slap retaliatory tariffs on one another, would cost Michigan 7,000 jobs by 2020, with 3,900 of them coming from the manufacturing sector.
“The imposition of a 25 percent tariff would spark a shift of nearly one million automobile assemblies away from Mexico primarily to China and elsewhere in Asia, but not to the U.S.,” Gabriel Ehrlich, director of UM’s Research Seminar in Quantitative Economics, said in a statement. “On the other hand, many light truck assemblies probably would move to the United States.”
Lori Wallach, director of Public Citizen’s Global Trade Watch, noted in a call with reporters Thursday that Canada and Mexico have played a big role in shaping the revitalized TPP. She said they pushed to remove stringent intellectual property rules that were favored by the U.S., which could foreshadow their stance on those in the ongoing NAFTA talks.
“Those IP issues directly impact the course of NAFTA negotiations, in that the Mexican and Canadian governments are fairly clear that one of the reasons they insisted those changes be done in a TPP among other changes before they agreed to it is that they didn’t want to be painted into having to accept those rather extreme U.S. IP standards in a renegotiated NAFTA,” she said.
Celeste Drake, trade policy specialist for the AFL-CIO, said negotiators have not done enough to address concerns about labor rules and wages in Mexico in trade talks this year.
“Global corporations and their CEOs have generally benefited from NAFTA, and that’s because they wrote it,” she said. “NAFTA is not a trade agreement, so much as an investment agreement — an agreement to make it easier to outsource jobs.”