You are here
Nafta is dead - long live Nafta
WHEN the North American Free Trade Agreement took effect in 1994, it was widely regarded - by friend and foe alike - as an ambitious experiment in economic engineering. To advocates, it promised the benefits of stronger economic growth for its three member countries: Canada, Mexico and the United States. To its adversaries, it threatened the loss of well-paid US manufacturing jobs to low-wage countries.
Even before he was president, Donald Trump was among Nafta's fiercest critics. During the campaign, he pledged to overhaul or terminate it. Now he has fulfilled his promise, unveiling a new, tentative US-Mexico trade agreement. Critics say it will raise car prices, while Mr Trump and his allies argue that it will promote good US jobs.
His next task is to coerce or cajole Canada into joining the agreement and then killing the Nafta label. "I like to call this deal the United States-Mexico Trade Agreement. I think it's an elegant name," he said in a phone conversation with Mexican President Enrique Pena Nieto. "I think Nafta has a lot of bad connotations for the United States, because it was a rip-off."
But by whatever label, any revised trade agreement will look a lot like Nafta. The Trump administration contends that it made breakthroughs in protecting "intellectual property" (patents, copyrights, trade secrets) and in opening markets for digital technology. Time will tell whether these claims amount to much. Otherwise, Nafta's major accomplishment - eliminating most tariffs among the three countries - would remain.
The one area where the new agreement is starkly more protectionist involves cars and trucks. All along, Mr Trump has aimed to shift more production from low-wage countries to the high-wage United States. He would achieve this goal by imposing a variety of conditions that vehicle manufacturers would have to meet to be exempt from a 2.5 per cent tariff.
First, the local content of these qualifying vehicles - required production in North America - would be raised from the existing level of 62.5 per cent to 75 per cent. Next, there would be a requirement that between 40 per cent and 45 per cent of the vehicles' content would have to come from workers earning at least US$16 an hour. This would be a huge boost for many Mexican auto workers, where hourly pay averages about US$3, reports The Washington Post's Heather Long. By contrast, US autoworkers average US$22 an hour.
The point, says an administration fact sheet, is to "support better jobs for United States producers and workers by requiring that a significant portion of vehicle content be made with high-wage labour".
The content requirements would pressure many auto parts' suppliers to keep their operations in the United States or to relocate factories that had moved abroad to return, according to the fact sheet.
Nor is this all, says economist Jeffrey J Schott of the Peterson Institute, a critic of the agreement. "There are layers and layers of requirements," he notes. For example, 70 per cent of the steel, aluminium and glass in vehicles must come from North American sources.
Indeed, the requirements are so complex that many auto companies may decide that complying with them is not worth the trouble, Mr Schott says. Companies may determine that paying the 2.5 per cent tariff is the least costly alternative.
However, that might not be the end of the story. Mr Trump is also considering raising car tariffs as high as 25 per cent because the industry is said to be vital to national security. This would, quite probably, result in hefty price increases and dampened production, hurting American consumers, workers and auto companies. In the worst of all possible worlds, everyone loses. THE WASHINGTON POST WRITERS GROUP