International Trade and Global Business


New Trade Agreement Butters up U.S Dairy Farmers, but may be Less Palatable for Other Workers

There was a collective sigh of relief on the continent when Canada agreed to join the replacement trade agreement for NAFTA, the quarter century-old pact that has been a model for other such regional agreements around the world.  The Presidential Administration rebranded NAFTA as the United States-Mexico-Canada Agreement.
There are some substantive updates in the new agreement, but critics claim that it’s a step back and will likely do more harm than good.
The aspect of the agreement getting the most attention is what it does regarding trade in motor vehicles. Three-quarters of the value of cars made inside the region must originate in the region.  Under NAFTA it was two-thirds of current. In addition, two-fifths of car content from motors to light bulbs must be made in countries where workers make more than $15 per hour. That’s even times the average hourly wage in Mexico, meaning that some jobs performed there will revert North to the U.S., or Canada.  The intent behind renegotiating NAFTA was always to make it more favorable to U.S. businesses and workers, with the emphasis on businesses because workers making above $15 per hour can always be replaced by robots. The motivations behind saving or creating U.S. jobs may have been sincere but profoundly naïve.
Cars will likely become more expensive for U.S. buyers as the result of USMCA, a tongue-twisting acronym. Asian competitors will get a leg up if they can export cars to the U.S. that are cheaper than U.S.-made vehicles.  Assuming Mexico’s auto plants lose market share, it will hurt U.S companies that supply parts to them. Separate tariffs on steel imports from Mexico and Canada will make U.S.-made autos even less competitive. If consumers shun U.S.-made vehicles, there will be a big price to pay in layoffs throughout the supply chain.
Escape clauses added
Another aspect of the agreement pushed as a positive but could become a negative is successful U.S. pressure to have the agreement re-authorized every six years. In addition, the agreement can expire 10 years after each review if any of the parties choose to walk away.  This could create a chilling effect on companies contemplating big investments in supply chains in and outside their own country.
Certainly, some good things came out of a refresh of NAFTA. Chapters on digital trade were added, which makes engaging in e-commerce somewhat easier for smaller companies buying and selling lower-value goods. USMCA extends some drug patents, and the U.S. gets a 3.6 percent share of Canada’s dairy, slightly more than farmers would have gotten if the President had signed the Trans Pacific Partnership Agreement. Also, it will be easier for Mexican workers to join labor unions to push for better wages and benefits.
At the end of the day, it’s hard not to see the glass as half empty.  One big example is even though the deal may butter up some U.S. dairy farmers, the Canadian dairy market is worth $11 billion. America’s car market is worth $500 billion and touches many American workers and buyers.  It would be sadly ironic if efforts to create a modest number of jobs under a new agreement end up killing a whole lot of jobs. Congress will try to avoid such ironies when it votes on the agreement, probably next year.


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