It is still too early to assess the future of NAFTA

On Monday, US President Donald Trump announced that he had reached a new trade deal with Mexico, and that it would replace NAFTA, the North American Free Trade Area. Two days later, we still do not have a clear idea of what exactly negotiators USA and Mexico have agreed, nor do we know how Canada will be involved. Trump’s announcement was obviously exaggerated and premature.

Hans Dembowski

29.08.2018

Yes, I know, Trump did indicate that Canada was free to join, and also threatened that Mexico and the USA would proceed if Canada did not join fast. The Canadian government has since indicated that it wants to negotiate, but it looks unlikely that matters can be settled fast. One reason is that NAFTA is about much more than car production, so other issues will have to be discussed too. Another reason is that trade deals are not up to the heads of state and government alone. They need to be approved by legislators of all countries involved. Legislative procedures in democracies are cumbersome and time consuming.

Trump is indeed putting considerable pressure on Canada’s Prime Minister Justin Trudeau, but nonetheless time may actually be on Trudeau’s side. Some observers now argue that Trump’s strategy of bilateral negotiations instead of multilateral talks is paying off now because he managed to pull Mexico onto his side. That is what a comment in taz, Germany’s left-of-centre newspaper, warns today.

I think things are more nuanced. Apparently, Mexican President Enrique Peña Nieto was keen on reaching a lasting deal before leaving office at the end of November. At the same time, president elect Andres Manuel López Obrador, who is commonly known as AMLO, seems to have supported Peña Nieto’s approach. That would make sense. The new president will want to focus on domestic affairs. He would prefer not to have difficult trade-policy issues high on the agenda. Mexico’s economy depends on trade with the USA, and the new president would find it helpful if things were settled before he takes control.

It is noteworthy, however, that Peña Nieto has insisted that he expects Canada to be part of the future trade arrangement. That will certainly be AMLO’s stance as well. Moreover, the leftist policymaker will not want to be seen to be caving in to Donald Trump. Quite likely, he will therefore team up with Trudeau in the not-too-distant future. After all, Mexico and Canada share a long-term strategic interest. They want a say in North American matters rather than having Washington call all the shots. Moreover, the legislators of both countries are keenly aware of this interest, and they will have to approve the final deal.

In this context, it is worth reiterating that the preliminary agreement reached by Peña Nieto and Trump is inconclusive. It does not tackle many relevant trade issues.

The new clauses that we have been told about basically concern the car industry and the duration of the agreement. To get tariff-free access to the US market, at least 75 % of the components in a car will have to be produced in North America, and 40 % to 45 % of those components must be made by workers who earn at least $ 16 per hour. Moreover, it has been decided that the new agreement should be reviewed every six years so it can be updated in line with future developments.

It is bizarre that the enforcement of the modified local-content rules will require considerable administrative effort. There will be more, not less red tape. Normally, the Trump administration is proud of abolishing regulations, but this time it is increasing bureaucratic burdens.

The clauses are designed to keep manufacturing in North America, but they will result in North American customers having to pay more for North American cars. That would be a competitive advantage for Asian and European car makers. Trump’s instinct will probably be to raise tariffs accordingly. Some observers now argue that US president is returning to binding trade rules and becoming more reliable in multilateral settings. That is the assessment of FAZ, Germany’s major conservative daily paper. I disagree. Trump will probably be tempted to use North American leverage to disrupt the global system. The good news, of course, is that he will not be able to do so without the consent of Mexico and probably Canada.

In principle, it is sensible to review and update trade agreements. The big challenge is to do so in a way that does not cause permanent uncertainty about what rules will apply in the future. Business leaders need to assess opportunities and risks, and they tend to shy away from unpredictable legal environments. That said, nation states reform their laws, so there is no reason why international regulations should have to last forever. But once again, details matter, and to assess the future of North American trade and world trade, we need to be told much more.

What we know is that Trump has so far proved to be very good at disrupting the established order, but he has not been able to build anything of lasting relevance. In my eyes, his recent NAFTA announcement does not change this assessment. Once again, he has obviously overstated what he has achieved. And as always, he is doing what he can to distract from his serious legal problems.