I’ve always been a free-trade advocate in principle, though admittedly not a student of the minutiae. As such, I agree with most of the criticism of Trump’s tariffs – that they simply raise prices for American consumers without helping more than a narrow sector of industry, if that.
Now, here’s a well-written and seemingly intelligent article from a small manufacturer claiming that Trump’s tariffs have helped drive a better deal with Mexico and Canada, and may yet work with China:
“The new U.S.-Mexico-Canada deal makes all three countries stronger in relationship to the other regions of the world. That creates even more leverage for the president. Those countries will have little choice but to follow Mexico and Canada back to the negotiating table with President Trump. The result will be more opportunities for my company, our employees and their families. The same is true for thousands of American manufacturers like ours who employ millions of other Americans.”
Since I (full disclosure) despise Trump and everything he stands for, I’d love to be able to punch holes in this argument, but I lack the policy and economic chops. Alternately, if the article is accurate, I’m willing to be an adult and admit Trump did something right.
I haven’t studied the deal in full, nor will I. I have better things to do than read a novel length trade deal. From what I do understand, it has pros and cons. It forces Mexican manufacturers to either raise hourly wages for laborers or pay for the privilege of exploiting them. That’s a good thing, but it will mean higher prices for consumers. It’s requiring that in order to avoid tariffs, 75% of the parts on an auto have to be North American produced. That will likely benefit Mexican businesses at the expense of Asian businesses, but will also lead to higher costs. Canada has long had protectionist agricultural policies and some of those (notably dairy products and wines) will be eased, so that’s a win for American farmers and a loss for Canadian ones. Overall, it will probably lead to lower consumer costs-certainly in Canada, but possibly in the US as well. It increases the length of patent protection for pharmaceuticals in Canada (the US patent length will be unchanged) and I’m really not sure if that’s good or bad. It’s bad for Canada and their Health System will be subsidizing American pharmaceutical companies, but the longer length of patent could convince pharmas to invest in research to drugs that before were only borderline profitable with the knowledge that they’ll have longer to sell in Canada which changes their RoI. I think that will be a minor impact, but a possible one.
Overall, this is probably a ‘win’ for Trump. It could raise prices, but it has provisions that are probably going to shift more money into the US economy from Mexico and Canada. On a purely transactional level, it’s not some sort of game changer, but US companies will likely be marginally more profitable and US labor slightly more competitive. The biggest beneficiaries will be American corporations and possibly Mexican labor-although that could shake out a lot of different ways that are difficult to predict. It could just shift jobs from Mexico to even lower wage countries figuring that they’ll pay the tariff regardless and Vietnamese labor is cheap as dirt-- the biggest losers will be Canadian farmers and Canadian taxpayers.
On a geopolitical level, this is a lose for the US. It really makes countries wary of doing business with us and encourages them to stop relying on our economy so much. If your goal is isolationism, then I guess it’s great, but I guarantee you that Canada is going to be trying to figure out how to decouple its economy from the US’s and there’s a danger that a disruption to the Mexican economy could start up the northward migrations again. It really pushes companies to find other markets that might not bite them so hard down the road. China is probably smiling right now. So… I don’t know.
He’s not fundamentally making an economic argument about freer trade in this case. It’s more an argument that we were successful in a game of chicken. Just scrapping the deal would have been extremely ugly for all three nations. We seem to have been able to play the threat of that to get a little bit more power at the negotiating table.
That doesn’t mean that playing chicken is a necessarily a good approach. Sometimes when you play chicken neither side blinks and two cars ram into each other at high speed. As Senoy brought up there can be other losses as well based on the choice of negotiating tactics.
Senoy – Thank you for that excellent analysis. Do you think it’s the details of the agreement that will make other countries more wary of dealing with us, or the blunt-object tactics the administration used to make it happen?
DinoR – This is what concerns me. Of course we can intimidate Canada and Mexico. Playing chicken with China is a different story, but the author of the article seems to think our success in North America gives us more leverage vs. China.
The most important fact about the new version of NAFTA is that it would preserve more and destroy less than Trump led his followers to believe. But making a few changes and giving it a new name lets him strike a heroic pose.
So Trumpists think their hero won big (“no more NAFTA”) but when it costs more to buy a car, they’ll never make the connection.
Tactics moreso than details. The details aren’t particularly egregious. Demanding higher wages doesn’t apply to most developed economies and getting rid of Canadian protectionism is probably something most countries like. The only big thing is the extension of patents and that’s not a make or break issue. The problem is that it makes agreements with the US appear unstable and subject to political whims. That’s scary. Right now the demands aren’t unreasonable, how about in 5 years? If your economy is too tied to the US, the next time we break a deal it could blow up your economy.
Canada is one of the least protectionist countries on the face of the Earth.
USMCA is, basically, NAFTA. One can talk about the minor details, but they’re quite minor.
The meta-point about all this making the United States appear untrustworthy is, in the long run, much more important that the little changes they made to NAFTA. It’s quite likely that part of the strategic calculus both Mexico and Canada made is that there are really only two possibilities; that either Trumpism will be over by the time the new deal is renewed or that, if it’s not, no agreement is worth the paper it’s printed on anyway.
That’s certainly my perspective. I will never buy American produce again. If the produce origin isn’t marked in my supermarket, then I ask the produce manager. If they don’t know, then I don’t buy it. Lately, I’ve been buying NZ apples. They’re lovely. I will neverever buy American dairy products. I will never buy an American car again (i.e. a car made by an American company). When I was in the Canadian Forces, and before that, I always thought of the USA as our close friend and ally. Now, I see them as inherently untrustworthy. It is beyond insulting that they would list Canada as a national security risk. I’m certainly not alone. Two weeks ago I was buying apples that were on sale. Their origin was not listed, so I went over to the produce manager. After a brief conversation, he said “I need to put a sign up saying they’re from BC; otherwise, I’m going to be answering that all day. You’re the 12th person to ask.” The USA is pissing away all of their international relationships, and will get nothing in return. And yeah yeah, I know America is #1. We’re so great at everything we don’t need anybody else. Well, we’ll see how that works out for you. Personally, I think we’re simply going to see the USA decline in international importance over the next several decades, and somebody else (likely China) will take their place. I wish it wouldn’t be China. I would rather Germany.
Yes, this. Had the US just offered Canada this plan a year ago, without all the Trumpian Temper Tantrums, we’d have likely said yes with little trouble. Canada gave a little, got a little, and preserved most of the existing agreement. All Trump added to the process was unnecessary delays.
Why? Are they a close ally that intentionally inflicted damage on us based on some sort of bullshit national security fig leaf? I expect China to act like a authoritarian bully, I do not expect that from the US.
And yet, here we are. In a place where the US demands clients, not allies.
Why is being an ally important to you, as a consumer deciding what to buy or not buy? From what you are saying here, it’s all about America hurting your feelings. I mean, why hold China to some kind of standards, or worry about adulterated products made by slave labor while destroying their environment and stealing your (and our, and everyone else) intellectual property, since authoritarian countries will be authoritarian. While the US hurt your feelings.
I have zero issue with you or Beep voting with your pocketbook. Don’t buy US. Was just curious if you do similar things with other countries, which is why I asked, or if this is really Freedom Fries!, Canada style. Sounds like it’s freedom fries…
It ain’t good. A Canadian farmer earns about 3dollars a gallon compared to an American farmer’s 1.80. That’s a big difference and a complete elimination of the tariff could flood the Canadian market with cheap American milk. American farmers are overproducing by such volumes that we’re literally dumping millions of gallons a year because we can’t find markets.
Here’s what’s really happening though. Canada doesn’t directly subsidize their dairy farmers, at least not to the extent that the US and many other countries do. Instead, what it does is limits imports and set quotas to artificially keep the price of dairy high. So rather than tax the Canadian people and give the money to farmers which is fairly standard around the world, they make Canadian consumers pay more for their milk by cutting off the supply from other countries (Of course, many Canadians just avoid the extra cost by slipping south of the border where we pay sometimes half as much for a gallon of milk or other dairy products.)
It’s six of one half a dozen of the other as to whether the system is unfairly rigged and it largely depends upon whom you ask. A vegan in the US would say that our system is bad because they are paying taxes to support products they don’t use. A Canadian who lives on the border and shops in the states might love it because American taxpayers are subsidizing their milk prices. I will say that a complete elimination of the tariff is going to be highly disruptive.
The great thing about the USMCA is that it is politically much more stable than NAFTA. People have been complaining about NAFTA since it was signed. 2016 was a low ebb in support for free trade with both Trump and Hillary running against it. When Trump was elected suddenly the Democrats supported free trade again. Since Trump signed the agreement the populists who voted for him will now be supportive. It has united the political spectrum for free trade in a way that has not been the case for a long time.