Donald Trump Breaks NAFTA Promise to His Base

In announcing the new free trade agreement; the United States-Mexico-Canada-Agreement (USMCA), Donald Trump tried to disguise it as “it’s not Nafta redone, it’s a brand-new deal.” The fact is that the USMCA is NAFTA 2.0. Like “Mexico will pay for the wall,” the promise by Trump to end NAFTA is also just another undelivered promise to his base. Whether labeled as USMCA or NAFTA 2.0, the agreement is a win for México.

On September 26, 2016, Donald Trump described NAFTA as “the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.” Trump has consistently railed against NAFTA promising several times that he was going to kill the trade deal. Trump repeatedly threatened to pull out of the trade deal, only to backtrack days and even hours later.

On May 9, 2016, Donald Trump blamed Bill Clinton for “one of the worst deals, ever.” He followed that rhetoric with, “a lot of people thought Reagan was, you know, for some reason everyone thought Reagan was NAFTA” on June 9, 2016. Trump added, “Ronald Reagan got a bum rap because NAFTA’s been a disaster” for the country, again blaming Clinton: “NAFTA, signed by Bill Clinton” on July 30, 2016.

On August 18, 2016 in Charlotte, North Carolina, Trump continued his attacks on NAFTA, “Here, in this beautiful and great state, so many people have suffered because of NAFTA. NAFTA. Remember NAFTA, what it’s done to this country. Bill Clinton signed the deal and Hillary Clinton supported the deal.”

On April 18, 2016, Trump added to his tirade against NAFTA with; “NAFTA’s been very, very bad for our country. It’s been very, very bad for our companies and for our workers, and we’re going to make some very big changes, or we are going to get rid of NAFTA for once and for all. Cannot continue like this, believe me.”

After it became apparent to the Trump Administration that pulling out of NAFTA, would be a “shock” to the financial stability of the country, Donald Trump changed his rhetoric away from ending the agreement towards renegotiating it “to make it a fair deal for the United States” and America workers.

The fact is that NAFTA is too important to America for Trump to end it. NAFTA was the brainchild of Ronald Reagan and was shepherded through Congress by the Republicans. Bill Clinton very reluctantly signed NAFTA into law. It is the Republicans that have kept NAFTA alive and who have forced Donald Trump to capitulate on ending NAFTA.

NAFTA is a Republican thing.

But Donald Trump needs to keep the illusion that he is keeping his promises to the American voters that voted for him. Thus, NAFTA 2.0 has been dubbed as the USMCA.

Trump uses the increase in the content of NAFTA cars as a significant change to the original agreement. Under USMCA, the vehicle’s content to qualify for tariff-free access must be 75%, an increase from the current 62.5%. But the increase to 75% will take three to five years after the new agreement is adopted by the three nations.

However, for México, the content requirement benefits Mexican manufacturers because it forces automakers to move away from Chinese, German, Japanese and South Korean manufacturers and make the parts in Canada, México or the United States. Mexican factories would likely get the bulk of the labor-intensive work.

The requirement that workers earn at least $16 an hour also benefits Mexican workers in that the fundamental promise of NAFTA for Mexicans was wage increases over time. Wages have increased as a result of NAFTA. The new requirement, that will not go into effect until 2023, five years from now, will in the end allow México manufacturers to produce higher-technology products.

More importantly, although the wage increase will benefit Mexican workers, it, nonetheless, is a set value that does not consider inflation. Rising inflation will discourage American workers while benefiting Mexican labor.

Also, ultimately, it will be the American consumer that will fund the Mexican wages.

The most significant win for the Mexican manufacturers is the “side letters” included in the USMCA that guarantee exemptions from American tariffs on up to 2.6 million cars imported from México each year. México exported 2.33 million cars to the U.S. in 2017. Thus, México gets to keep sending the same number of cars to American consumers.

The changes to the dairy market have little to no effect on the Mexican dairy market. Those changes affected the Canadians more than the Mexicans.

Although the Chapter 19 dispute resolution was something México did not fight hard for, it remains intact because Canada demanded it. The Chapter 19 resolution allows any of the three countries to challenge the imposition of tariffs or restrictions via an arbitration panel. The United States opposed Chapter 19 as a restriction on its sovereignty, especially after realizing how often the Americans lost in the arbitration.

The most significant addition to NAFTA 2.0, under the guise of USMCA are the intellectual property (IP) provisions added to it. When NAFTA was originally negotiated, IP was not a significant concern at the time as high-technology remained securely in America.

As Mexican manufacturing expertise has increased, access to intellectual property has increased as well.

The real threat to American technology has been and continues to be China, where respect for IP is severely lacking.

Nonetheless, the provisions in IP benefits México because it allows it to license American technology while securing Mexican IP at the same time.

Donald Trump demanded a “sunset clause” for any renegotiated NAFTA. Trump wanted the United States to scrap the free trade agreement if it chose to after five years.

Instead, what Trump got under the USMCA is a 16-year sunset clause renewable after the first six-year review built into the agreement. In other words, unless the U.S. exercises a review of the agreement in six years, the sunset clause for NAFTA 2.0 is 2040. Even if the U.S. decides to assert the six-year “review” window, it has limited options to fundamentally change the overall agreement.

The USMCA, or NAFTA 2.0 must be still be approved by the Congresses of the three nations. Until then, the original NAFTA still prevails.

But, the makeup of the United States Congress may change during the upcoming mid-term elections scheduled for next month. If the Democrats take control of the House or the House and the Senate then the final version of the USMCA may be different. It is important to remember that many Democrats oppose NAFTA due to their labor base while the Republicans generally believe in NAFTA.

There is, however, an interesting aspect of the revised agreement. It includes a new provision whereby Canada, México, or the United States must notify the other two countries if one country pursues a trade agreement with a “non-market” country. The other two countries could end the USMCA with any country that signs another trade agreement with a non-market country if they choose to do so.

China is the obvious country in this provision.

For México, this is extremely beneficial for it because China has been difficult for México to compete against because of China’s cheap labor costs. One result of NAFTA is that Mexican wages have being increasing, pricing Mexican labor above Chinese labor. Although Mexican wages are not at the levels of Canada or the United States, they are higher than Chinese wages and thus México has been unable to effectively compete against China.

The new provision makes México wage competitive again for NAFTA products keeping Mexican labor a significant part of the agreement. For México, NAFTA has always been about allowing Mexican labor to create the consumer goods sold in America.

In the end, no matter the name, NAFTA remains the law.

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