Donald Trump Backtracks on NAFTA

As expected, Donald Trump is now backtracking on doing away with NAFTA, or substantially renegotiating it, as he promised during the campaign. This is because the reality of NAFTA sobered up his political rhetoric when his supporters realized the cost to them. Supply chains and global trade are very complex systems that cannot be debated through 30-second sound bites of good or bad. During the election, Donald Trump argued that NAFTA was a terrible trade agreement and that México was taking advantage. But the reality is much more complex than the terrible sound bite that Trump used for votes.

The problem is that NAFTA cannot be undone simply by willing it so. The resulting economic catastrophe would be detrimental to the United States and its work force. The resulting chaos south of the United States would imperil the safety of the country. Anyone with a mediocre understanding of global economics understands this reality. But that did not stop Donald Trump from making a promise that he could not keep.

Unfortunately, the Mexican economy has been damaged. Other than damaging Mexico’s economy and creating animosity between the two countries, Trump’s promise of putting America First is nothing more than hot air when it comes to NAFTA.

Yesterday, the Wall Street Journal reported on a draft of the required notice by the White House to Congress outlining its negotiating points for NAFTA. This is a preliminary draft notice and like everything Trump, it can change in the upcoming days. However, the draft notice is notable in that it waters down substantially the political rhetoric of “tearing up” NAFTA and instead pursuing a renegotiation of specific items, or tweaks of certain things.

México has already signaled its willingness to negotiate certain parts of NAFTA.

The US Trade leaked draft letter outlines items that the Trump Administration wants to negotiate with Canada and México. They are addressing cross-border data and digital commodities. These likely include security and accountability for intellectual property and customer transaction data stored on servers in the other countries. With the rise of cloud computing this has been an ongoing item on the wish list for trade negotiations.

Additionally, the draft outlines negotiating the elimination of the international review panels that some have argued undermines national sovereignty in trade disputes. The draft also wants to address national origins of parts contained in end-user products.

Interestingly the national origins section can ultimately help México become more competitive in the products it sells to the United States. Under NAFTA, a percent of the parts included in the commodities must originate from Canada, México and the United States. Because the percentage rate is low, it has allowed Asian parts to enter the supply chain limiting Mexico’s ability to increase its participation in the manufacture of the products it exports. By increasing the parts threshold, México would be in the position of taking on more of the supply chain of major products.

The other issue that the Trump administration wants to negotiate is the “Buy American” theme.

(Although I understand the concept of buy American, I can’t let the notion stand without pointing out that it is misnomer because the continent is America and thus products manufactured in Canada, México and the United States are, by their nature “American” products. The proper terms should be buy U.S. manufactured products.)

The Trump administration wants to give preferences to products manufactured in the United States over those made elsewhere. It is important to point out that NAFTA’s primary goal was to synchronize manufacturing between Canada, México and the United States by doing away with preferential treatment of certain products based on their national origins. It is also important to understand that Trump’s draft letter is just a wish list. Canada and México must agree to the changes. Both countries may also add to the wish list as well.

Finally, the draft letter states that the Trump administration wants to establish NAFTA rules allowing for the modification of tariffs to protect domestic products from injury from imports.

Unless the Trump Administration dramatically moves away from the draft letter when it officially notifies Congress of its intent to begin the NAFTA negotiations, then clearly the Trump administration now understands how integrated NAFTA has made Canada, México and the United States.

Some argue that the apparent Trump backtracking on NAFTA is premature because the final announcement to Congress has not been made official. However, the backtracking is likely being driven by predominant Donald Trump supporters who have realized that the threat on NAFTA could severely impact their own bottom lines.

When Donald Trump began to threaten NAFTA, the Mexican government made its position clear that it would strategically retaliate against U.S. imports to México against states who heavily supported Trump during the elections.

About a third of Mexico’s corn comes from the United States. Several U.S. states exported $2.5 billion worth of corn to México in 2016. Among them are Iowa and Nebraska who heavily supported Trump during the elections.

The corn farmers descended upon Washington in mass and demanded that Trump tone-down his attacks upon México as well as not consider the 20% tariff to help pay for the wall. In a letter to the Trump administration, Nebraska Sen. Ben Sasse wrote that the Nebraska farmers did not want to become “collateral damage” in a U.S.-México trade war. Nebraska exports about 20% of its corn to México while Iowa exports almost all its corn to México, over 70%.

Clearly, Donald Trump supporters are starting to realize that México has its own arsenal with which to counter the Donald Trump attacks upon it. They have realized that the price for America First doctrine is too great of a cost for many of them.

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