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Will New NAFTA Be More Protectionist or Less?

This week has seen some swift movement in the talks surrounding the renegotiation of the North American Free Trade Agreement (NAFTA). On Monday, the President held a join phone press conference with the President of Mexico announcing agreement on a new U.S.-Mexico Free Trade Agreement. While President Trump seemed satisfied to leave it at that, with the possibility of Canada joining, President Pena Nieto stressed that he regarded it as essential for Canada to join to make it a new NAFTA. Canada has indeed rejoined the talks, although the latest news suggests there are sticking points. The question remains, however, whether the new trade agreement will be more protectionist or less.

It certainly seems to be the case that the deal will be more protectionist when it comes to automobiles (the industry that seems to drive a lot of the administration’s thinking on trade). The agreement has rules of origin that increase the amount of North American-sourced content a car must contain to qualify for zero tariffs. It also requires Mexican car factories to pay $16 an hour, which is an example of the sort of labor regulation imperialism Ryan Young and I decry in our paper, “Traders of the Lost Ark.” These new rules will surely raise the cost of cars and SUVs, just as the administration’s deregulation of fuel economy standards is trying to bring them down.

However, if agreement is reached with Canada, it will surely include reductions in Canada’s own protectionism surrounding its dairy industry. Just as this administration reserves a privileged place for autos in its trade policy, Canada jealously guards the “protection” of its dairy industry. Its “supply management” system for Canadian dairy products looks and acts like a New Deal-era commodity support program (although the US dairy system still has similar features), and part of the way it works is to charge ruinous tariffs on dairy imports.

Ironically, the previous Canadian government (which was less beholden to dairy interests) had agreed to lower trade barriers in this area as part of the Trans-Pacific Partnership (TPP) deal, a concession the country withdrew once the U.S. left the deal (the TPP was not perfect, but it was still probably a net positive for the U.S.).

With Canada holding out, it is looking more likely that we will be left with a U.S.-Mexico agreement that arguably the President did not have the power to negotiate. America and Canada’s dual intransigence over their favored industries is likely to doom all of us to higher prices and reduced choice.