Economy

A New NAFTA and the Art of the Deal

Trump announced a tentative trade agreement with Mexico, calling it "much better" than NAFTA.

Lewis Morris · Aug. 28, 2018

President Donald Trump announced a tentative trade agreement with Mexico Monday, calling it “one of the largest trade deals ever made” and “much better” than the North American Free Trade Agreement (NAFTA). Speaking from the Oval Office, Trump was joined by Mexican President Enrique Peña Nieto via conference call. Nieto also chimed in that it was an “incredible deal for both parties.” Is it?

As always with trade, the answer is “yes and no.” There are good aspects and bad ones.

Points reached in the agreement include changes to automobile manufacturing. Each car produced would have to be 75% sourced in North America, up from 62.5%, to avoid tariffs when being transported across national borders. Also, 40-45% of each car produced must be manufactured by workers making $16 per hour or more to avoid tariffs. That helps American manufacturers, but it will raise prices for consumers. Additional updates to rules on intellectual property and labor are also part of the agreement.

The deal still must be approved by Congress and the Mexican government. Trump is eager to make this happen before the midterms, and Peña Nieto is likewise hoping to have his government approve the measure before he leaves office on Dec. 1. At this point, there don’t appear to be any insurmountable political hurdles to prevent the trade agreement from becoming a reality, but never underestimate the machinations of American Democrats or Mexican Socialists like incoming President-elect Andrés Manuel López Obrador. And in any case, time constraints likely mean it isn’t going to happen this year.

It’s important to note that this is a strictly bilateral trade agreement between the U.S. and Mexico. What will become of Canada, the third member of NAFTA, is yet to be determined, though clearly Trump means to use this as leverage with our northern neighbors. Trump told reporters that negotiations with Canada would start back up immediately, and Peña Nieto voiced his hope that the U.S. and Canada would be able to come to an agreement. Chrystia Freeland, Canada’s minister of foreign affairs, said separately Monday that her country was encouraged by the optimism shown by the U.S.-Mexico agreement. “Progress between Mexico and the United States is a necessary requirement for any renewed NAFTA agreement.”

Trump, of course, says he’s prepared to scrap NAFTA altogether, insisting that the very name has bad connotations. He has repeatedly referred to NAFTA as a historically bad trade deal for the U.S. — a “disaster” — and thus he would rather this deal be referred to simply as the United States-Mexico Trade Agreement. Moreover, Trump has signaled his comfort with cementing two separate bilateral deals with Mexico and Canada, though those two nations still hold out hope that NAFTA can be renegotiated and salvaged.

Trump’s strategy is simple: The U.S.-Mexico deal puts pressure on Canada, which was sidelined while Trump pursued a divide-and-conquer approach to negotiating better deals with America’s biggest trading partners.

Markets reacted favorably to the news, with major U.S.-based auto manufacturers seeing bumps in their stock price and equity markets across North America also getting a boost.

A few months ago, Democrats, business leaders, and international trade groups cried that Trump was going to wreck the world economy and crash America’s economic rebound with his tariffs and his America-first approach to new trade deals. None of this has come to pass. In fact, little by little, the very nations that claimed they were prepared to engage in a trade war with the United States have started changing their tune.

Earlier this summer, the EU came to an agreement with the U.S. that will allow us to export more produce and liquid natural gas to Europe. The door was also left open to work toward a zero-tariff trade deal between the U.S. and EU.

The new deal with Mexico and the positive signs for an agreement between the U.S. and Canada suggest that Trump will continue scoring points on trade. The more victories he lines up, the stronger will be his bargaining position with tougher nations like China.

As we have said frequently, never underestimate the art of the deal.

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