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October 3, 2018
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ECONOMY CAPITAL ACCOUNT
New Nafta Shows Limits of ‘America First’
Resistance from Congress, business and Canada limited President Trump’s ability to set back free trade
President Trump will have to get Congress to approve the United States-Mexico-Canada Agreement, which he touted in the Rose Garden of the White House in Washington, D.C., on Monday.
President Trump will have to get Congress to approve the United States-Mexico-Canada Agreement, which he touted in the Rose Garden of the White House in Washington, D.C., on Monday. PHOTO: RON SACHS/ZUMA PRESS
272 COMMENTS
By Greg Ip
Oct. 3, 2018 8:00 a.m. ET
To free traders, the new Nafta is a bitter pill to swallow. It introduces managed trade to autos, waters down the foreign rights of corporations and normalizes national security as a pretext for tariffs. Many of its improvements, such as on intellectual property and labor rights, were already in the 12-nation Trans-Pacific Partnership, from which President Donald Trump has withdrawn.
But the verdict is different when judged by a different standard—how the world’s trading system survives the most protectionist U.S. administration in memory. The new deal shows the limits to Mr. Trump’s “America First” agenda and an underlying resilience to the existing order. The reason: The resistance Mr. Trump encountered from Congress, business, his own advisers and U.S. trading partners circumscribed his leverage and may again in the future.
MORE
New Nafta Shows Trump’s Trade Strategy
U.S. Pivots to China, With Nafta Deal in Hand
Deal Eases Threat of Auto Tariffs on U.S. Economy
Read the Text of the Agreement
Tracking Trump’s Trade Talks
Remaking Nafta: A Look at Key Sectors
How the Deal Came Together
At the outset, the U.S. held all the cards: Mexico and Canada depended far more on exports to the U.S. than vice versa. Mr. Trump shared none of his predecessors’ affection for trade agreements, either on their own merits or as tools of foreign policy. His threats to abandon the North American Free Trade Agreement, the U.S.-Korea Free Trade Agreement and even the World Trade Organization weren’t hollow. He proved this with unilateral tariffs on washing machines, solar panels, steel and aluminum. He told U.S. Trade Representative Robert Lighthizer, “I will back you up like no other USTR has been backed up in history,” Mr. Lighthizer recounted to reporters on Monday. “And he did that.”
Yet in the end, the new U.S.-Mexico-Canada Agreement looks a lot like the old Nafta. Mexico’s only significant concession was on autos and parts: rules requiring more production in North America, higher wages for workers, and potential tariffs if its exports to the U.S. exceed 2.6 million vehicles.
Yet these auto rules may have little practical significance. Jeff Schuster of LMC Automotive, a consulting firm, says some lower-priced models now assembled by Volkswagen , Mazda and a few other manufacturers in Mexico may no longer qualify for duty-free entry. Rather than shift production to the U.S., they may simply pay the 2.5% tariff, he says. That would hurt U.S. consumers (especially on lower incomes) without helping U.S. workers.
Nafta 2.0, What Is It, What's Different
Nafta 2.0, What Is It, What's Different
The U.S. and Canada reached a last-minute deal late on Sept. 30 to revise the North American Free Trade Agreement. We look at what it is and what's changed. Photo: Getty Images.
The cap on exports may discourage manufacturers from expanding capacity in Mexico but won’t affect current shipments, since U.S. auto demand has stagnated. Canada also faces an export cap, but it is far above current exports and thus even less likely to bind. This is reminiscent of South Korea’s agreement to double the quota of imported American cars that don’t have to comply with its safety standards. No manufacturer had filled the old quota.
Once the U.S. had a deal with Mexico, it urged Canada to sign on or be left out. But Canadian negotiators, who have a reputation for intransigence dating back to the original trade deal with the U.S. in 1988, didn’t capitulate. Canada also had assiduously cultivated allies among U.S. governors, senators, congressmen and business groups.
Ron Johnson, Republican senator from Wisconsin, says he made the case to Mr. Trump’s advisers that a deal should include Canada, not just Mexico. He says he told them what “businesses on the ground were experiencing because of the steel and aluminum tariffs, and what would happen if we weren’t able to continue a free-trade zone in North America.” While his constituents applauded Mr. Trump’s crackdown on Chinese expropriation of intellectual property, they simply didn’t see Canada and Mexico the same way. Wisconsin farmers were upset last year when Canada blocked imports of their ultrafiltered milk. But Mr. Johnson said Canada’s ambassador reached out to Canadian-owned processors in Wisconsin who then bought the milk, saving those farmers from lost sales.
What’s in the New Nafta
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LUKE SHARRETT/BLOOMBERG NEWS
Had U.S. negotiators proceeded without Canada, there was a real risk that Congress wouldn’t ratify an agreement with only Mexico, particularly if Democrats take control of the House of Representatives in November’s midterm elections.
How that risk affected the outcome is unclear. Canada did end up making an important concession by expanding U.S. access to its heavily protected dairy market. Still, Canada was prepared to give ground here since it already had done so in the TPP and its free-trade agreement with the European Union. And the U.S. gave imports more access to its protected peanut butter and sugar markets. So this is a genuine victory for free trade that benefits consumers.
Meanwhile, Canada succeeded in a key priority: preserving binational panels that can overrule U.S. decisions to impose anti-dumping and countervailing duties. That was a notable concession by Mr. Lighthizer, who as a private lawyer representing companies seeking protection, had suffered a reversal at the hands of such a panel and long complained that they infringe on U.S. sovereignty.
The outcome has important lessons for future trade negotiations. Mr. Trump will soon be negotiating with Japan and the EU over steel and autos. Yet he will continue to be vulnerable to pressure from exporters and businesses in the U.S. that stand to lose from higher costs at home and retaliation abroad, and consequently resistance from Congress. (This won’t help China, which gets far less sympathy in Congress.) Meantime Mr. Trump’s threats to upend the WTO are likely to meet even more resistance from Congress than his threats to scrap Nafta.
And sometime next year Mr. Trump will have to get Congress to approve the USMCA. He may then find himself extolling the sorts of deals he has long disparaged.
