Mexico Freeze, Is Trump Really About To Kill NAFTA?
SANTIAGO — It is ironic that in the United Kingdom, there are people suggesting their country should join NAFTA, the North American Free Trade Agreement, to compensate for Brexit. For this comes just as Mexico, Canada and the United States, NAFTA’s signatories, are wondering whether or not the treaty will still exist at the end of this year.
After five rounds of talks in 2017 and agreements on two of 30 chapters under discussion, there is no way the parties will have a draft agreement ready by March 2018, as planned. A new round of talks is scheduled for Jan. 23 in Canada, without ideas so far on counter-proposals to some of the United States’ protectionist demands. These include redefining rules of origins for manufactured items coming into the U.S. from Mexico and Canada (consisting mainly of cars, but also mobile phones, computers and household appliances), to be able to avoid the imposition of tariffs on them.
The United States’ hardline positions are being forced by — who else? — the ever unpredictable and obtuse Donald J. Trump, who called NAFTA in 2016 “the worst trade deal ever.” His central arguments are based around one piece of evidence he keeps citing: his country’s $70 billion trade deficit with Mexico.
Trump yearns for an inexistent past.
But figures for commercial exchanges contradict him. Three-way trade has quadrupled during NAFTA’s 24 years, and today totals more than $1 billion. In services, the United States enjoys a $7 billion surplus with Mexico, which mitigates the deficit in traded products. With Canada, it enjoys a consolidated trade surplus.
By insisting on repatriating U.S. car and parts plants set up in Mexico, Trump yearns for an inexistent past and a situation that would harm both the United States and Mexico. Prices for cars and other products will rise, and factories will use more robots instead of workers, which means few jobs would be created in the United States, in the best case. NAFTA has allowed factories to settle where it is most cost-efficient, to make cars, televisions and other goods for U.S., Canadian and Mexican consumers at the lowest possible prices.
The United States wants tighter rules of origin for manufacturers, with 85% of their components made in the U.S. instead of 62.5%, as required by NAFTA. Carmakers importing parts from Asia would find that difficult to meet. Another unacceptable demand is the sunset clause — a signatory’s right to unilaterally withdraw from the agreement every five years if dissatisfied with its results.
Serious conversations on these two clauses have yet to start. There is agreement in principle on telecoms and renewable energy standards, while 28 other sectors remain in limbo.
Trump has said more than once that without a satisfactory agreement, the United States will leave NAFTA, as it did the Paris climate pact and the Trans-Pacific Partnership (TPP). He has already threatened Mexican car imports with a 25-35% tariff.
NAFTA’s own statutes allow a signatory to leave with six months’ notice. But it is the U.S. Congress that determines trade policies in keeping with the Constitution, and it is by no means clear that the Republican establishment will follow Trump’s volatile positions.
U.S. businessmen certainly disagree with the White House. All major industrial sectors are lobbying for a realistic renegotiation, and even if Trump did suddenly decide to leave NAFTA, Congress and business interests would hastily make bilateral, sectoral accords, to ensure things stay more or less the way they are.
They have better arguments than the president. A recent study by the Boston Consulting Group finds that NAFTA’s demise would destroy 50,000 jobs. The world’s big carmakers are still investing in Mexico. When Trump became president, Ford and General Motors announced they would halt production plans for Mexico and return to the U.S., but that is not how things look a year on. Kia, Mazda, Mercedes Benz, BMW and Toyota have just opened plants there or will do so within the next two years.
A kind of Singapore south of the U.S. border.
In spite of evidence in NAFTA’s favor, there are numerous pessimistic voices in its member states. Trump is more likely to kill off NAFTA if he is denied the $18 billion he has asked of Congress to build the wall he promised as a symbolic move to safeguard the country’s southern border. Without the money, the only election promise he could meet for his voters is to leave NAFTA.
Mexico has begun preparing for the treaty’s possible demise. The country is already the most open of OECD economies. It has signed free-trade pacts with 46 countries, investment promotion agreements with 33, and nine more within the Latin American Integration Association. This year it expects to sign a free-trade pact with the European Union. Two of its current presidential candidates have vowed that if NAFTA dies, they would lift tariffs on imports from all countries, turning Mexico into a kind of Singapore south of the U.S. border. It would not be easy, since the rating agency Moody’s estimates Mexico’s economy to shrink by 4% without NAFTA, while Banco Santander’s estimate is 2.6%.
Whatever happens, this Trumpian renegotiation is another strategic mistake and blow to the country’s role as champion of free trade since World War II. It is difficult to believe that he would do something so harmful to his own country as destroying the world’s second biggest free-trade and integration pact after the European Union. And yet, nothing is impossible given his awful performance so far on the foreign policy and environmental fronts. Best not to underestimate the intellectual inabilities of the self-professed “very stable genius” who currently calls the White House home.
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