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New NAFTA Could Have Been Much Worse

The new USMC (United States-Mexico-Canada) trade agreement isn’t very different from the old NAFTA (North American Free Trade Agreement), and that’s a good thing. Given the Trump administration’s emphasis on government-managed trade, it could have been much worse. Now President Trump can claim a political victory and hopefully turn his attention to non-trade issues, while actual trade policy remains mostly unchanged.

The agreement now goes to Congress. Passage is likely, though a possible party change in next month’s election could complicate matters. Incoming Mexican president Andrés Manuel López Obrador is the other political variable still in play. He has similar views to President Trump on foreign trade. But as a show of political good faith to current President Enrique Peña Nieto, he has indicated he will likely sign the agreement despite his misgivings. López Obrador’s populist reputation does not make this a guarantee, however. But Canada’s joining the agreement means the USMC Agreement will likely clear all political hurdles.

The 1,812-page agreement leaves intact the mostly tariff-free relationship between the U.S., Canada, and Mexico. It even has a few improvements, such as a slight liberalization of Canada’s dairy policy. U.S. agriculture policy will remain heavily subsidized and insulated from competition, however. Among the downsides are new wage and country-of-origin rules that will make cars more expensive for consumers and potentially disrupt carefully designed supply chains.

The negotiations also missed some significant reform opportunities. Oddly enough, this is actually a good thing. The current U.S. administration and the incoming Mexican administration both favor government-managed trade, so the timing was bad to open trade negotiations in the first place. While this is a sad commentary on contemporary politics, negotiators scored a victory by not letting their bosses make things significantly worse.

The most obvious missed opportunity is that recent U.S. tariffs against Canadian and Mexican steel and aluminum will remain in place, allegedly for national security reasons. As these new tariffs make themselves known throughout the supply chain, they will further increase car prices, plus other items such as houses and manufacturing equipment. There are other avenues for reforming these tariffs and the retaliations they caused, though they may have to wait until the next administration.

Hyper-complicated country-of-origin rules in the USMC Agreement run for 234 pages, and are similar to the ones in the old NAFTA. These are guides for figuring out how to apply tariffs to, say, a good designed in one country and built in a second country, from parts made in still other countries that are not even members of NAFTA/USMCA. This complexity could be avoided by simply doing away with tariffs altogether, but that was never going to happen in the current political environment. Again, the economy is better off simply for the new USMC Agreement not making things significantly worse.

Also troubling is a general NAFTA/USMCA ethos under which some countries determine other countries’ regulatory policies for them. This is generally due to trade-unrelated policies in trade agreements, mostly on labor, environmental, and intellectual property issues. Right now, it is the U.S. formulating Mexico’s regulatory policies, so there is little uproar about it, at least in the U.S. (indeed, this may have been included to increase support from labor union interests). But if the tables ever turn, this will quickly become a hot-button issue that could sink the agreement.

In short, NAFTA has a new name, but it’s still NAFTA. Pundits will just have to remember that USMC now means “United States, Mexico, and Canada” in addition to “United States Marine Corps.” There are a few marginal changes here and there in the USMC Agreement, some good and some bad. But a major bullet has been dodged between America and two of its largest trading partners. That the Trump administration is calling it a victory means that a major economic loss has been avoided for the time being. It would have been better to leave well enough alone, but under the circumstances, this may be about the best possible outcome.