Donald Trump is the most protectionist American President since Herbert Hoover, so one of our trade-policy goals of the last three years has been damage control. That’s the best case now for supporting Mr. Trump’s revisions to the North American Free Trade Agreement to gain votes from Democrats.
The good news is that the new U.S.-Mexico-Canada trade deal puts to rest Mr. Trump’s threats to abandon the 1994 agreement and blow up continental trade. The new deal preserves most of the tariff-free trade in the original Nafta. That’s no small matter when through October this year U.S. trade with Mexico and Canada exceeded $1 trillion.
That will be a relief to U.S. farmers in particular. Mexico and Canada bought some $38 billion in U.S. farm exports in 2016, up from less than $9 billion in 1993 before Nafta. The new agreement also opens the Canadian dairy market to U.S. producers for the first time, even if still too modestly.
There’s particular political value in committing both Mexico’s President Andrés Manuel López Obrador, the left-wing economic nationalist known as AMLO, and Mr. Trump, the Republican mercantilist, to open trading rules for North America. This is especially important for Mexico, which is backsliding under AMLO’s policies after decades of economic progress. If Americans think illegal immigration is a problem now, watch what happens if Mexico slides into Argentine or Venezuelan socialism. Economic integration with the U.S. is important insurance against Mexico becoming a failed state.
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The shame is that in many respects the new deal is worse than Nafta, especially its bows to politically managed trade. The new deal tries to steer auto investment with new rules of origin that 75% of a car’s content must be made in North America, up from 62.5% under Nafta. This raises the cost of manufacturing, making North American products less competitive worldwide.
Also reducing North American competitiveness is a new rule mandating that 40% of an auto qualifying for tariff-free trade in the region has to be produced by workers earning $16 an hour. Mandating wage rates ignores the relationship between productivity and output and sets a bad precedent for future trade deals. Mr. Trump is using the mandate to make Mexico less competitive for car production.
The Trump Administration made these labor provisions worse in concessions to the AFL-CIO to get Speaker Nancy Pelosi to allow a vote on the House floor. The unions battered Mexico to allow a new enforcement process that will give American unions a new way to intrude in Mexican labor disputes.
If American activists complain about labor practices at a plant in Mexico, the U.S. Trade Representative can call for a multilateral panel to rule on the dispute. If the three-person panel rules in favor of the complaint, the U.S. can then impose tariffs in escalating stages. The risk is that this will produce a flood of new complaints.
North American auto production costs will also rise thanks to a new layer of protection for U.S. steel. The new deal mandates that 70% of steel used in North American vehicles must be made on the continent, and in seven years that share will have to include so-called slab steel that is now often imported before it is finished into specific steel products.
The U.S. auto companies say they can live with these higher costs, but other manufacturers may not. Some may find it makes more sense instead pay the 2.5% most-favored-nation tariff to import. Others will move full manufacturing to Mexico for vehicles and other products they export, reducing investment in the U.S.
Mr. Trump also bowed to the Pelosi Democrats’ demand to remove the 10-year protection for data exclusivity on biologics, a blow to one of America’s growth industries. This won’t change current U.S. law, which allows 12 years of protection, but Mexico allows only five and Canada eight. The new deal sends a signal that the world can loot American property rights—and American politicians will cheer them on. This is the opposite of “America first.”
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We thought Mrs. Pelosi would deny a vote on new Nafta as she did four other trade deals in 2007, and on that point Trade Rep Robert Lighthizer was right. But the deal could have been better for free trade had it been presented when Republicans ran the House. Our concern now is that the deal’s concessions to politically managed trade will become the new baseline for future negotiations.
Higher production costs and protection for politically influential industries won’t help workers. Senators will have to consider whether these bad precedents are worse than the benefit of saving most of the original Nafta.
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North American Damage Control - The Wall Street Journal
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