Goodbye NAFTA, Hello USMCA (NAFTA 2.0)

NAFTA USMCAGoodbye NAFTA, Hello USMCA (NAFTA 2.0)To say we’re skeptical is an understatement.

On Sunday night Canada joined the new NAFTA, which the Trump Administration is rebranding the U.S.-Mexico-Canada-Agreement. Apparently there was a desire to just call it USMC, which in keeping with the wrong-headedness of the entire trade and tariffs war, would have been a branding problem since most people don’t confuse the U.S. Marine Corps with anyone or anything else.

The point is that we’re not just a bit skeptical of the USMCA. Revisiting the details of NAFTA, which was signed in 1993, before there was really any internet commerce or a biotech revolution, is a good thing. But the timing and (apparent lack of) fundamental change to a deal President Trump has said is the worst in U.S. history, has us scratching our heads.

Political Theater

It pays to remember that nothing has yet been changed. This announcement sets in motion the next steps to getting a new deal passed into law under fast-track authority — Trade Promotion Authority. President Trump, President of Mexico Enrique Peña Nieto and Canada’s Prime Minster Justin Trudeau must sign the deal, which they are expected to do in November, right before Peña Nieto is replaced on December 1. The U.S. International Trade Commission will need to carry out an economic analysis for Congress. Then Congress gets a chance to vote (up-or-down) once that is done. Oh, and then the Mexican Congress and the Canadian Parliament also have to sign off on the USMCA. And they don’t care about our mid-terms. Although things might move faster in Mexico given President Pena Nieto’s imminent departure on December 1, 2018.

All of which is to say that the grand announcement by President Trump at the Rose Garden was little more than political theater, so he can say going into the mid-terms, that his administration has a new deal. But it’s far from a done deal.

What’s In It For Me?

Apparently bigger markets if you’re a dairy farmer, as Canada has opened up its markets more to the U.S. Except when you look at the details, it’s underwhelming. USMCA forces Canada to eliminate price fixing for Class 7 dairy products – milk protein concentrates, skim milk powder, infant formula. But the overall system of supply management (price fixing by artificially restricting imports) remains, locking American farmers out of 96 percent of Canada’s dairy market. American producers are still stuck with overproduction of milk and milk products, which means taxpayers are stuck with the buy back program, that is literally creating government cheese, sure to be on school cafeteria pizza soon.

Similarly, this definitely-not-NAFTA deal expands a number of provisions in automobile manufacturing. For cars and trucks to be sold duty free, at least 75 percent of the automobile’s parts must be manufactured in North America. This is up from a current requirement of 62.5 percent. Also at least 30 percent of the work on a car, and eventually 40 percent, must be done by workers with a base wage of $16 per hour – three times what typical Mexican automakers earn. This might help some workers, but it will also drive up the price of US manufactured autos. Doing this at the same time the U.S. is trying to grow Asia as an export market for U.S. manufactured cars and light trucks, if you drive up the cost too much, you might just drive U.S. manufacturers to build cars in those countries instead.

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There’s No Turning Back Clocks

Ah yes, jobs. The big drive behind renegotiating NAFTA has been to bring back jobs. Except it’s not that easy, any more than bringing back lost markets will be easy. Redirecting complicated supply lines that drive production is not like turning a switch on or off.

Some say, “Fine, we’ll just pay more.” But we already are. That’s what tariffs are – they’re a sales tax, that’s ultimately absorbed by the consumer because producers can’t soak up the price increases past a point and still stay in business. If folks don’t like the rise in prices right now in everything from Coke to cheap goods, imagine how much more the ire is going to be when bigger things – that we can’t live without – go up in price: cars, car batteries, fridges, washing machines. Because the price increase there won’t be small, it’ll be in the 20 to 50 percent range.

The response to that has been, “Fine, we’ll just make our own!” Except again, it’s not so simple. It’s not that we don’t want to, it’s that we shouldn’t. From ball bearings to machined tools to clothing, we simply don’t have the need to make everything in-house anymore. It’s why we’ve reached out internationally. And those folks aren’t going to stop being in business. Because we’re not their only customers.

There is no turning back the clock on global trade, or its effects on the American economy. Tariffs – which have brought us to this point in the trade talks with Canada and Mexico – aren’t the answer. They put Washington in the position of picking winners and losers while making consumers spend more for less. And the protectionism built into the new USMCA isn’t the answer either.

More analysis needs to be done, but thus far the USMCA is looking a lot like NAFTA 2.0.

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