Guest Contribution: “The New NAFTA”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared in Project Syndicate.

Donald Trump thinks he once again pulled off a smashing victory on October 1, delivering on his oft-repeated campaign promise to terminate NAFTA, “the worst trade deal ever,“ and replace it with something much newer and better. One is tempted to say to oneself, “Let him think that.” The US-Mexico-Canada Agreement may not be an improvement over the status quo, but at least it is an improvement over the end to free trade in North America which he had threatened.

By now, a Trump modus operandi has come into view. First you threaten to blow up the world, and then everybody is grateful when the eventual outcome turns out to be only modestly worse than where we were.

As Trump sees his genius, he starts the game by playing very rough. In the case of North Korea’s nuclear program, he started by insulting Kim Jong Un and threatening to rain down “fire and fury” on the country. In the case of America’s two biggest customers, he started by insulting Mexicans and Canadians (as “rapists” and “very dishonest,” respectively) and hitting them with tariffs (in violation of US treaty commitments) and with threats to end North America’s free trade arrangements altogether. Then, after a year and a half of tough bargaining, the other countries cave in and he emerges with “the single greatest agreement ever.”

That is Trump’s description of his new version of NAFTA. His modus operandi always includes laughably exaggerated characterizations as to what he has accomplished. In the case of the nuclear issue, he claimed after his June 12 photo-op summit with the leader in Sentosa, Singapore, “that problem has been solved,” even though the North Koreans in fact gave up very little – certainly not their nuclear weapons.

Only a name change?

It is tempting to say that he came out of the Canadian negotiations with the one thing he really wanted, which is a change in name, to USMCA. That allows him to claim victory to his supporters, who may not bother learning the substantive content of the new agreement. It is an instance of “branding,” which was the heart of Trump’s pre-political career in business. (Eswar Prasad points out that the new designation also delivers on the promise of “putting America first” in name, if not in terms of the country’s interests.) But, to be fair, there is a bit more to it than just a name change.

So — assuming approval by the US Congress, which is not a foregone conclusion — what are the major substantive aspects of the revised NAFTA and how should one evaluate them? Needless to say, how you should evaluate them depends on who you are, e.g., whether you are an American dairy farmer and whether you are a mercantilist. Four aspects in particular have garnered attention in particular have garnered attention: cars, milk, disputes, and sunset.

  1. Cars
    Two measures pertaining to the auto industry are noteworthy. First, the agreement increases the fraction of content that must originate within North America, from 62 ½ % to 75 %, to reduce imports of components from Asia. Second, it requires that at least 40 percent of production come from workers with pay averaging more than $16 an hour, which is well above Mexican wage levels.

    There will be some benefits for some American auto workers, at the expense of everybody else. The US auto industry as a whole may well be worse off, in terms of the decreased competitiveness of North American autos on world markets that will result from the disruption of existing efficient supply chains. This is especially true if one factors in the increased cost of steel and aluminum inputs resulting from Trump’s tariffs on those two metals, which remain in effect, let alone if one takes into account foreign retaliation against US auto exports. As for average Americans, they will be worse off, suffering a rise in the cost of living as is usual with protectionism.

  2. Milk
    Agricultural concessions have also received a lot of attention. Both Canada and the United States have long protected their dairy farmers from the rigors of competition, even more than the rest of their agricultural sectors. Trump placed very high priority on getting Canada to lower its tariff, even though it already imports more American milk than the US imports milk from Canada. The northern neighbor has now agreed to imports of up to 3.6 percent of its dairy market. That is reportedly worth about $70 million. The numbers are very small in the scheme of things (.00003 of total US exports). But still: the market opening is good if you are an American dairy farmer, bad if you are a Canadian dairy farmer. And, in itself, it is good if you believe in free trade.

    What if you are an American mercantilist who wants to maximize the US trade balance? Probably no effect. Little noticed is that, in return for some Canadian liberalization in dairy, eggs and poultry, the US agreed to some liberalization in its three most highly protected agricultural areas: “In exchange the United States will provide new access to Canada for dairy, peanuts, processed peanut products, and a limited amount of sugar and sugar containing products.” (USTR) Another plus for free trade, but now a minus for mercantilists.

    Another point that tends to get lost is that Barack Obama had managed to wrest similar dairy concessions from Canada to close the deal on the Trans-Pacific Partnership in 2015. When Trump became president he of course promptly pulled the US out of TPP. Overall the TPPan expansion of NAFTA that truly merited trumpeting — would have been better than this USMCA, even from a narrow mercantilist US viewpoint. Under the TPP, nine additional Pacific Rim countries, including Japan and Vietnam, would have reduced major barriers to US exports.

  3. Disputes
    Those opposed to recent trade agreements of the last quarter-century have often complained about the dispute settlement mechanisms. There is an important distinction between Investor-State Dispute Settlement (ISDS) mechanisms and other trans-national panels that judge trade issues. Those who fear that corporations have become too powerful in international negotiations object to ISDS mechanisms, because they fear that interests of multi-national corporations will over-ride valid domestic regulations, such as those dealing with health or the environment. The US and Canada have now agreed to drop the ISDS from NAFTA.

    The US also agreed to keep NAFTA’s “Chapter 19” procedure for settling other trade disputes. This US concession might seem surprising, in that the Trump negotiators yearned for Americans to be designated as prosecutor, judge and jury in Anti-Dumping and Countervailing Duty cases. But in fact it is unsurprising, in that Canada was never going to give up its position and accept such a one-sided way of settling trade disagreements. A good outcome.

  4. Sunset
    Most alarming of the proposals from the Trump Administration had been a demand for renewal of NAFTA every five years, with sunset as the default option. This would have crippled the agreement. The perpetual uncertainty over renewal would have seriously impaired the ability of businesses to plan ahead in their trade and investment activities. Canada was never going to give in to this demand either. Fortunately the US side backed down. Unfortunately, it did secure a 16-year sunset provision. Hopefully future periodic reviews will take place at times when more sensible leaders are in charge. Then the automatic sunset can be abolished. Perhaps we can even re-take its rightful place in TPP, after watching other Pacific Rim countries doing business without the US.

There are many other provisions, which will take time to digest. Worker protection is enhanced, rather as it was in TPP. Also reminiscent of TPP, there are provisions for the digital economy and extension of intellectual property in such areas as copyrights and biologics data (giving pharmaceutical companies 10 years of protection) – more wins for US corporations and setbacks for the anti-globalizers.

Bottom line

The overall verdict on the new NAFTA? (Sorry. On the USMCA.) It is a move in the direction of the TPP. It is not as good as TPP. It is not even a net improvement on NAFTA. But it’s better than blowing up North America.

This post written by Jeffrey Frankel.

50 thoughts on “Guest Contribution: “The New NAFTA”

  1. pgl

    So many excellent comments, so little time! Let’s focus on this:

    “There will be some benefits for some American auto workers, at the expense of everybody else. The US auto industry as a whole may well be worse off, in terms of the decreased competitiveness of North American autos on world markets that will result from the disruption of existing efficient supply chains. This is especially true if one factors in the increased cost of steel and aluminum inputs resulting from Trump’s tariffs on those two metals, which remain in effect, let alone if one takes into account foreign retaliation against US auto exports. As for average Americans, they will be worse off, suffering a rise in the cost of living as is usual with protectionism.”

    The stock prices for both Ford and GM are down and Ford is announcing layoffs. Yes – Trump and Kayne West would call this winning!

  2. pgl

    The new restrictions on the automobile market may be good news for that German PeakTrader mentioned the other day. Peaky tried to convince us that Germans were too poor to afford cars. Of course this is the usual BS from Peaky but yea I bet his one German friend is another failed banker who can’t manage to make monthly payments on a car. Now if we make it harder for Americans to purchase German made cars then just maybe the price of a VW may drop so Peaky’s friend can finally afford one. Of course the higher price for cars here will likely mean Peaky cannot afford a car. Let’s teach him to ride a bike!

    1. baffling

      “Let’s teach him to ride a bike!”
      but apparently peaky has a habit of being late to everything, which is why he wants his car rather than waiting for the bus. my guess he is also too lazy to ride a bike. he should have spent less time eating all those twinkies in his banker office before getting canned by the financial crisis.

  3. Richard A.

    If a $16 an hour is good for Mexicans, shouldn’t be good for US workers too? Do Republicans want to go down this road? How about a $16 an hour minimum wage for those guest workers on the very Republican H-2A and H-2B visas.

    1. pgl

      I hear you but I think the $16 per hour applies to Mexican workers in the automobile sector. Even 13 years ago U.S. automobile workers were getting much more than this per this (dated) BLS discussion:

      Some UAW workers are getting twice this $16 today. Not sure what workers down south are getting when they work for foreign based automobile manufacturers.

      1. baffling

        not that i like the disparity in wages, as it hurts us workers, but is not the point of free trade to allow a nations strength (cheap labor, plentiful resources, high tech, etc) to be the advantage that allows global consumer prices to fall? enforcing these wages in mexico is not free trade, but protectionist. i recall in the past, peaktrader applauded our use of cheap chinese labor to allow for us to have cheaper products and hence a higher standard of living. i am surprised that the wage rules in nafta 1.01 are considered winning by peak, corev and trump.

  4. joseph

    Trudeau must have been playing a very weak hand thanks to backstabbing by Conservatives if he agreed to this without also resolving the steel and aluminum tariffs as a condition.

  5. Zi Zi

    The Mexican minimum wage is about allowing Mexican workers to keep the money they earn from corrupted officials.

    The Sunset clause is about resolving new problems before too late.

    TPP is good for lowering tariffs and offshoring.

    1. Moses Herzog

      You’re incredibly DUMB, if you think Mexican workers will see the marginal difference in that $16 and whatever they got before. All they do is play paper games and put different dept labels on the workers and “presto” they got their “magical” $16 average wage for factory laborers. As a Chinese person you of all people should understand how bureaucrats play this game.

      You’re either being very disingenuous or speaking like you’re still in Chinese middle school. I advise either growing up fast or stop lying. Most people on this blog will see through you easier than looking through a Rihanna evening dress.

  6. Lord

    If it were named the Trade Regional Uniform Multilateral Proposal it no doubt would have sailed through.

    1. Moses Herzog

      @ Lord
      Humorous, and yet, at the same time, realistically believable.

      By the way, your music is really awesome:

      And your “posse” is pretty good also: It’s said by Washington DC insiders that in the a.m. hours donald trump listens to this exact version of the song before going to secret rendezvouses where he rims Kim Jong-un all night long. Trump “on the rebound” after his rejection from Putin:

      trump forlorn after being ignored by Putin. What can we do??

  7. PeakTrader

    Regarding Baffling’s comment, I never applauded the exploitation of Chinese labor. I noted the horrid conditions of China’s factory workers, which lower U.S. consumer prices for some goods. There should be labor standards, along with environmental standards. If a country wants to subsidize production, for example, to lower U.S. prices, that’s its loss. Exploiting labor and the environment reduce prices even further for a more unlevel playing field. How a trading partner competes is important.

    1. pgl

      Gee – we never realized you were such a progressive! Of course you do know that real wages in China have risen considerably over the past generation. Or maybe not!

    2. pgl

      A graph of how real wages have massively increased over time:

      Not that their workers are ready to shop on Rodeo Drive on a regular basis but if Peaky thinks this is the picture of exploitation, may I suggest he FINALLY learn to look on some actual evidence for once in his life!

      1. PeakTrader

        China’s manufacturing wages average less than $4 an hour compared to about $22 an hour in the U.S..

        And, I suspect, the difference in compensation is even greater.

        Of course, you totally ignored the enormous social costs of China’s growth-at-any-cost policy.

        Don’t be so ignorant.

        1. pgl

          Enormous social cost you say? Well China did sign the Paris accords. Your boy Trump decided the US should just abandon it. Careful there Peaky – you are about to be fired from Team Trump.

          Now as far as comparing the current level of wages as opposed to how they evolved. There is something called convergence but then you would never understand this as it involves something called the Solow growth model.

          1. 2slugbaits

            here is something called convergence but then you would never understand this as it involves something called the Solow growth model.

            In growth theory there are two aspects to “convergence” and I’m pretty sure that PeakTrader doesn’t understand either one of them. You’re referring to the Solow model of convergence of growth across countries. And you’re right; PeakTrader doesn’t get it. But there’s also a convergence rate along the balanced growth path within an economy, and he clearly doesn’t understand that aspect of the Solow growth model either. You can tell by some of his comments about how tax cuts and deregulation will lead to some kind of burst in permanent economic growth rates. The Solow growth model tells us that those kinds of changes take a very long time to evolve along the balanced growth path…literally one or two generations and not one or two years as PeakTrader seems to believe. He just doesn’t understand the differential equations in the Solow model. Now I wouldn’t expect CoRev to understand the Solow growth model because he prides himself on never having read an econ textbook; but PeakTrader likes to pretend that he has a strong econ background. If he ever did study the Solow growth model, then I can only conclude that it was a very long time ago and he’s forgotten it completely.

          2. PeakTrader

            2slugbaits, you really have no understanding of long run, short run, or real growth. It’s all way over you’re head.

            And, I’ve never disputed the Solow growth model. The fact you keep bringing it up proves you don’t understand economics.

      2. PeakTrader

        And, it should be noted, China’s manufacturing wages began from a very low starting point, well below the Philippines, Bangladesh, or Vietnam. Now, those countries are more competitive to attract manufacturing jobs.

        1. pgl

          “China’s manufacturing wages began from a very low starting point”.

          Duh – you finally learned to read a graph. Now – look up the Solow growth model and learn a little economics for a change.

    3. baffling

      “Regarding Baffling’s comment, I never applauded the exploitation of Chinese labor.”
      you defended the outsourcing of labor to cheap overseas nations that imported cheap products, and argued it raised our standard of living dramatically. this was your position peak. you cannot have it both ways, applaud the cheap imports and quietly complain about their labor and environmental standards-and ignore our own issues with labor and environmental standards. i pointed out this hypocrisy to you in the past. you live in a fantasy world, peak, where on one hand you applaud cheap imports and on the other hand complain about the conditions that give you those cheap imports.

  8. PeakTrader

    Many countries don’t want to give up their trading advantages without something in return.

    So, it’s very difficult to achieve actual free trade and open markets.

    Maybe, over time, more trade barriers will be reduced or eliminated.

  9. PeakTrader

    And, regarding some of Baffling’s and Pgl’s fake news:

    Buying a car in Denmark:

    And: “There is a certain sense that the driver should be slightly ashamed to be driving a car at all. Real Danes drive bicycles. This is partly a tenet of environmentalism – the Danish national religion – and partly because of an egalitarian conviction that no one in Denmark should have anything unless everyone else has one. The Danish government subscribes to both of these principles, and makes car ownership as difficult as possible.”

    No wonder gasoline was $8 a gallon not long ago, taxes and fees are ridiculous, and parking tickets are high. Welcome to the Nordic wonderland. Happy pills or being drunk will solve all the problems

    1. pgl

      Danes CHOOSE to ride bicycles and this someone justifies your stupid comment about Germans not being able to afford cars? Dude – seriously think about doing something else as your poor mom is about to disown you for such embarrassments of the family.

    2. noneconomist

      But where are the boat and plane loads of Danes (Norwegians and Swedes) lusting for freedom who can’t wait to get here?
      With Trump hoping “more Norwegians” will immigrate, there should be a flood of government-impoverished, overtaxed Scandinavians (as well as that unhappy German you talked to who is apparently representative of 75 million Germans) who are banging down doors to get here.
      Give us your poor, your tired, your overtaxed Scandinavians yearning to make this land their land. They must want to DRIVE that ribbon of highway and see above them that endless skyway…..

      1. PeakTrader

        The best Europeans moved to the U.S. already, including during the Industrial Revolution.

        Some Europeans need Big Mother to take care of them.

        1. Ulenspiegel

          “The best Europeans moved to the U.S. already, including during the Industrial Revolution.”

          Like Trump’s family. You got what you deserved. :–)

          1. noneconomist

            Amazingly, they needed a few million Africans and another few million ( second tie?) r Europeans to help them succeed.

        2. noneconomist

          Shout out to my Scottish and Scots-Irish forbears who arrived mid 18th century and proceeded to farm, mine, cut timber, open businesses and–along with plenty of other “best Europeans” provided much of the necessary labor for the Industrial Revolution.
          Or, where would one my favorite rich Scots–Andrew Carnegie–have been without them? (And those “unwashed” Poles, Hungarians, Germans, Czechs, Italians, et. al. who also made possible his acquisition of incredible wealth)

          1. noneconomist

            OH, and a big shout out to those Chinese laborers who did what my fellow Scots-Irish (and “regular” Irish) would not or could not do: enable the rail crossing of the Sierra Nevada with many hanging from ropes on treacherous mountainsides. Often while receiving less pay than their “European” counterparts. Where would that phase of the Industrial Revolution have been without them?

    3. 2slugbaits

      PeakTrader Has anyone ever told you that you have very Philistine tastes….big ugly McMansions, gas guzzling rolling dentist offices. I’ll bet you even have some of those black velvet paintings of Elvis hanging on your McMansion walls. BTW, the average Danish man is 2.1 inches taller than the average American man. Maybe that’s because they’re healthier because they prefer to ride their bicycles to the post offic rather than take the car down to the end of the driveway.

      1. PeakTrader

        2slugbaits, how tall is the average American of Danish descent?

        And, why are so many Americans from Latin America so short?

        Don’t know how you conclude American houses are ugly. My dad is a civil engineer and I’ve seen many housing tracts from San Diego to Seattle. They’re houses foreigners envy and not ugly at all. Maybe, you don’t like spacious houses, built by taking advantage of each outside environment with big yards and many conveniences – middle class houses. In Colorado, the square feet and yards are even bigger and cheaper. It’s amazing, a middle class household can afford a big beautiful house.

        1. pgl

          “why are so many Americans from Latin America so short?”

          Seriously? Can you go even one day without spouting such racist BS? I’m sure those Mexicans you are so incredibly scared of ask why are so many failed bankers so incredibly stooooopid?!

    4. pgl

      I wonder if PeakTrader realizes his little smear of Denmark may get Peaky fired as communications director for this White House. Note this:

      “New cars are taxed at 180 per cent and the impact trickles down to used car prices. This means that a modest second-hand saloon suddenly becomes an indicator of extortionate wealth and most people drive matchboxes.”

      Yes Denmark places taxes on the purchase of cars. But could someone explain (V-E-R-Y S-L-O-W-L-Y so he might get it) that Trump’s tariffs on imported cars are TAXES which will raise the cost to Americans wanting to buy a car.

      Is this the Trump grand plan? Make sure working Joes cannot afford cars so they must learn to ride bicycles to work. Got it!

    5. baffling

      well, first i would like for peak to point out directly my fake news, if he wants to accuse me of such. apology accepted peakloser.

      second, is it any wonder that we get a FAILED banker to encourage the us population to make one of the worst financial investments possible? peak, you do realize your approach is to encourage the fine folks of the usa to purchase a $40k plus asset which depreciates yearly, especially early on, and has an enormous yearly carrying cost in maintenance, gas, insurance, parking, etc plus liability. and then repeat such a financial blunder in another 5 years or so. and you wonder why you are a failed banker peak?

  10. PeakTrader

    Can someone explain to Pgl, for every $1 in Trump tariffs, Trump cut taxes $10.

    So, the government is getting 10% of the Trump tax cut back.

    1. Ulenspiegel

      “So, the government is getting 10% of the Trump tax cut back.”

      Blue collar Americans pay more, the rich get reduced taxes. Boah.

      You must be either rich or stupid in order to support such a program. My bet is the latter.

      Hint: The economic inequality is high in the USA, higher taxes for the rich and better programs that give better paid jobs for the poor would be better.

    2. pgl

      Distribution of income – I get that words with more than 4 letters are over your head. But the average Joe is not spending freely on Rodeo Drive because someone else get a reduction in the corporate tax rate.

      Then again there is something called the long-run government constraint which basically notes that taxes over the long-run are driven by government spending in the long-run. So as Trump increases defense spending, taxes over the long-run. Robert Barro and others have written extensively on this. Of course you would never understand what they wrote as it involves understanding financial economics.

  11. PeakTrader

    Trump tariffs aren’t a big deal and may result in lower trade barriers, along with accelerating the shift in manufacturing from China to other Asian countries and the U.S., which have become relatively cheaper.

    “By Chiavarone’s calculation, the sum of tariffs over the next three years amounts to just one-tenth of the effect of stimulus. He estimates that tax cuts, repatriation and government spending should bring in around $2 trillion through to 2020, while this round of tariffs could total $200 billion over the same stretch.”

    1. pgl

      “Steve Chiavarone, portfolio manager at Federated, told CNBC”.

      Lord – whenever you spot Peaky doing the Google, always expect some village idiot like this saying something really dumb!

  12. joseph

    PeakTrader: “Can someone explain to Pgl, for every $1 in Trump tariffs, Trump cut taxes $10. So, the government is getting 10% of the Trump tax cut back.”

    Ah, so Trump has replaced the Trickle Down Theory with the Trickle Up Theory.

    Tax cuts for the rich paid for by tariff taxes from lower class consumers. It’s diabolical.

    1. PeakTrader

      That’s a very tricky theory.

      You want businesses to succeed rather than burden them with high taxes and excessive regulations.

      Where do you think real money comes from?

      1. baffling

        peak, you have a poster boy in jared kushner. apparently he is very wealthy, and hasn’t paid federal income taxes in years. you would argue that is was legal. but i will argue the rules should not permit this to occur. when people complain about the rich and their benefits, this gets to the heart of the matter. my mother pays more taxes per year than kushner (and probably trump as well). that is a sign that the system is broken. and you seem to have no desire to fix it.

          1. 2slugbaits

            If the NYT stories are true, it seems that Donald Trump earned his money the old fashioned way as well…he inherited it from a family of gangsters going back to the turn-of-the-century. And apparently Donald’s sister (a former federal appellate court judge) is being fitted for an orange suit as well. What a family.

      2. pgl

        “Where do you think real money comes from?”

        Let me guess. Those JOB creators. Such BS – they get handouts from the government but create no new jobs.

        Tricky theory? No – a stupid set of assertions which has NOTHING to do with economic theory.

  13. pgl

    PeakTrader’s massive confusion is on full display today (well nothing new there). First he is worried that Germans cannot afford cars but he is also doing his usual China bashing noting that despite the rapid increase in their per capita income over the last generation, their manufacturing wages are still lower than ours.

    But why do American automobile workers earn higher wages? A large part of this has to do with technological advances that we did not invent. Ford has benefitted from German technology and something called Lean Production which of course we stole from the Japanese. But what is Peaky’s big complaint with China? That they allegedly steal our technology? Which we of course stole from Germany and Japan.

    Yes let’s make sure the Chinese never make cars. Especially since they might set up some American factory to make Malibu door handles. If they do that – America goes into the toilet!

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