Trade Disaster Averted for Now

The new trade agreement with Canada and Mexico has a new name: USMCA. It’s the replacement for Nafta and arguably worse from an economic point of view. If Nafta was managed trade, not free trade, the new agreement includes provisions that mandate even more government management.

It’s a step further from free trade than the agreement it replaces. Still, it is an agreement of sorts, which means that the ultimate disaster, a full-on shutdown of trade between the US and Canada, has been averted.

Some aspects are newly dangerous.

First, “Canada’s dairy exports could face a new tax to discourage its producers from pricing their exports below market prices,” says the Wall Street Journal. Second, “the new deal strips protections against predatory government behavior for most foreign investors.” Third, “Passenger vehicles will no longer enjoy duty-free access across borders unless they meet higher North-American-made content requirements in both finished products and parts. This will add costs and complexity to building cars on the continent, and make the final products less competitive world-wide.”

The WSJ further comments:

Worse, the deal opens the door for using trade deals to dictate a minimum wage and labor policy in Mexico. Car companies in Mexico will have to pay well above market wages on 40% of their output to qualify for duty-free treatment. Ford and GM have resigned themselves to this and may be able to finesse it, but some people we respect think the net result will drive car production at the margin away from North America.

Country of Origin

These new mandates on country-of-origin rules reinforce an outdated conception of economic nationalism. If the entrepreneurs in one country think of a product as part of a business in the same country, sell it to consumers in that same country, but have it built elsewhere, the rules say it has to be marked as an import. That makes no sense, especially in these times when most everything is made everywhere (the iPhone is made in dozens of countries).

These bogus designations then become the basis of an even worse habit of assembling trade deficit statistics. They are accounting fictions that say nothing about who or what is benefiting, but politicians use the statistics to whip up nativist paranoia about foreign countries owing “us” money.

Further, it is not consistent with peace and trade to use tactics akin to blackmailing trading partners to accept US exports of heavily subsidized products. In this respect, the agreement dabbles in new forms of what might be called trade imperialism, by imposing rules against restrictions on genetically modified crops and mandating enforcement of US-based intellectual property rules. None of this has anything to do with free trade.

At the same time, financial markets rallied on the news. Why? Because until this agreement, the trade actions of the current US administration seemed not to have any end game but autarky. By comparison, managed trade – “the government intervenes into the free market with the aim of warding off specific imports and to favor the export of specific goods," according to Antony Mueller – is a way to avert disaster.

Nafta Was Not Free Trade Either

As a person who has been writing about the dangers of conservative-style protectionism for three years, I do regard the agreement with Canada and Mexico as a great relief. As bad as trade agreements can be, they are better than the most realistic alternative to them, which is mercantilist politics that raises tariffs and other barriers to imports and foreign investment. It’s part of the mistaken politics of our time that few countries today are willing to engage in good trade policies unilaterally; that is, without regard to restrictions and subsidies in other countries. Given that, trade agreements are an improvement.

That said, regional trade agreements are worse than globalized ones because they are designed to build in a political bias to override rational economic decision making. Such agreements are inherently discriminatory against nations outside the targeted region.

This speaks to the great question: why did the Trump administration set aside its aversion to free trade to push a pact with Mexico and Canada? The explanation could have to deal with a larger agenda of wanting to push more trade war with China and Europe. That’s the worst possible interpretation. The best possible interpretation is that the administration intends to pursue agreements with every country.

Free traders can only hope that future agreements will be improved and made universal. Oddly, if we have to have trade agreements – and ideally governments would get out of this business entirely – the model might be the General Agreement on Tariffs and Trade. GATT came together at the end of World War II out of a conviction that free trade is an essential guarantor of peace and prosperity among nations. That was true then and remain true today.

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Jeffrey A. Tucker

Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his emailTw | FB | LinkedIn