With NAFTA 2 concluded, will President join allies against China trade misbehavior?

Trade correspondent L.C. reports: The NAFTA renegotiation was finally concluded with the October 1st release of the text of the revised agreement. This will allow it to be signed by the three member countries before Mexican President Enrique Peña Nieto leaves office on December 1st. Getting the NAFTA re-do out of the way raises the question of whether President Trump will wrap up agreements with the EU and Japan in order to refocus with them on China’s trade misbehavior – or continue his trade war against both his key allies and China.

USMCA, a.k.a. NAFTA 2.0

US-Canada negotiations concluded at the last possible moment to meet the October 1st deadline. The new deal was widely greeted with relief – mainly because the prolonged negotiations had created uncertainty for business, namely, US demands that the private sector opposed and the President’s threat of an outright US withdrawal.

The new agreement largely preserves the duty-free treatment of goods traded among the three member nations. Auto trade, however, is now more regulated and restricted.

The name “NAFTA” is terminated in favor of rebranding NAFTA 2.0 under the new name “US-Mexico-Canada Agreement (USMCA).” The three countries’ legislatures need to ratify the accord, with problems likely to arise only in the US Congress, which will act next year after the 116^th Congress is seated.

The US dropped or compromised on its “poison pill” demands. The changes from NAFTA 1.0 to the USMCA include some provisions that are trade-liberalizing and some that are trade-restricting.

The auto regulations are the most trade-restrictive aspect of the revised trade pact. They are expected to raise prices, cut choices for consumers, spur some car-makers to relocate to the US, others to move abroad, and overall, diminish North American auto-industry competitiveness. The just-released text shows that the Trump Administration is holding open the option of hiking its most-favored nation (MFN) 2.5% tariff on cars if auto-makers move production abroad in order to ignore the onerous new rules-of-origin (ROOs).

Promise broken?

Canada and Mexico are especially disappointed that the USMCA did not lead to the immediate end of the US Section 232 steel and aluminum tariffs imposed on them. This means that their retaliatory tariffs against some US exports will continue.

The President said the tariffs will remain until “something different like quotas, perhaps” can be worked out. Removal of the tariffs will be the subject of discussions, but they have yet to be scheduled. This was especially vexing for the NAFTA partners and for US farmers hit by retaliatory tariffs because both the President and Commerce Secretary Wilbur Ross said earlier this year that the tariffs would be removed once NAFTA 2.0 was hammered out. Leaving them in place appears to be a promise broken. Trump tweeted last March that “Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.”)

Nevertheless, the USMCA does feature changes that provide needed updating and modernization of the 23-year-old pact, such as

• rules forbidding tariffs on digital trade and data localization requirements;
• generous rules for small-medium enterprises and certain non-tariff barriers;
• Mexico and Canada raised their de minimis levels (the cap on small purchases that individuals can import duty-free), which will help US online retailers;
• customs procedures will be streamlined, expediting express shipments;
• energy provisions are updated; and
• the US won inclusion of a currency surveillance provision.

The small opening of Canadian dairy access was mirrored in US concessions lessening somewhat its sugar, peanut, and dairy protectionism.

But some changes to the new pact are trade-restricting, such as

• a 20-year extension of copyright protection,
• a 2-year extension of biologic drug test data protection for Canada, and
• the ending of the US program allowing Mexican trucks on US highways.

Another disappointment: the USMCA contains US-imposed requirements that infringe Mexican sovereignty, notably labor and environment provisions that dictate national laws and standards.

One provision in the new pact, Section 32.10, allows withdrawal from the USMCA if any member nation concludes a trade pact with a non-market economy (NME), such as China, without prior notification and approval. This “was a last-minute demand made by the Americans…[to prevent] China dumping subsidized products into [the US] market through Mexico and/or Canada,” the South China Morning Post reports.

Pivot to China? Or more equal-opportunity ally-bashing?

Most of those who reluctantly supported President Trump’s hard-line tariff policy inside and outside the Administration said that the conclusion of the NAFTA renegotiation, which quickly followed the KORUS wrap-up and the launch of new trade talks with the EU and Japan, will now allow the US to turn its full attention to China. Neil Irwin, in the New York Times, described the anticipated pivot: “After revised deals with those allies [Canada, Mexico, EU, Japan, South Korea] are in place, the administration will most likely seek a concerted effort among them to isolate China and compel major changes to Chinese business and trade practices. The ultimate goal, in other words, is to reset the economic relationship between China and the rest of the world.” Irwin quotes economic adviser Larry Kudlow saying, “We are talking to the EU again… to Japan again, and we are moving to what I have characterized as a trade coalition of the willing to confront China.”

This is what China most fears.

Irwin notes that “A crucial question is whether the administration’s strategy of pummeling allies with attacks, threats and tariffs can yield not just revised trade agreements, but also the trust needed to undertake a concerted campaign against China,” through what one analyst called the “coalition of the coerced.”

This possibility of a pivot is suggested by Vice President Mike Pence’s speech on October 4^th accusing the Chinese of interference in the US midterms; by reports that the White House has decided to enlist the Administration in a whole-of-government approach to curbing China; by the insertion of the Section 32.10 clause in the USMCA restricting trade treaties with China; by penalties recently imposed on the Chinese military for purchasing from a sanctioned Russian arms supplier; by a ramp-up in US assertiveness in the South China Sea; by the issuance on October 4th of a report on the US industrial base [pdf download] in which the President singles out China as the key threat; and by an October 4th Bloomberg News report (whose timing many saw as not accidental) that Chinese agents have inserted spy chips in various network and computer hardware sold to the US.

Separately on Capitol Hill, legislation is progressing that would, among other things, encourage arms sales to Taiwan and the deepening of US security partnerships in Asia.

It seems, however, that there is a significant problem with the hoped-for strategy: the President himself does not appear to be on board with a pivot. Or rather, he may intend to go after China aggressively but has no intention of easing his protectionism toward other trading partners to facilitate their cooperation on the China problem.

He continues to incorrectly believe that tariffs represents contributions to the US Treasury from abroad. Just this past week he said he’ll use the tariff revenue “from China” to fund health care. But tariffs on imports – from China or any other foreign country — are actually taxes on US consumers and the US industries importing foreign intermediate goods.

By threatening even allies with huge tariffs, Trump suggests — as he told reporters at the USMCA announcement — other countries should consider it “a privilege…to do business with us.”

If the president truly favored a sharpened focus on China, an obvious strategy would be to re-enter the Trans-Pacific Partnership (TPP). Another obvious strategy would be to work with Japan and the EU to reform the WTO to better deal with China’s abuses. Tokyo and Brussels have promoted just such efforts with Washington.

Joining with allies against China would be a plus for Republicans in the mid-terms and might unlock some much-needed last-minute campaign donations.

But in the talks about to start with the EU and Japan, the President is making harsh demands under threat of Section 232 auto tariffs – after bragging that this threat is what won him the USMCA agreement. Seeing this, Brussels and Tokyo are keeping options open by warming relations with Beijing. EU-China talks on WTO reform start soon, and Japan is actively promoting the Regional Comprehensive Economic Partnership (RCEP), which includes China. Though Japan has trade agreements with most RCEP members already, it doesn’t yet with China, to which it exports just about as much as it does to the US.

Who’s the non-market economy now?

Among the ironies of current US trade policy is that while it is targeting China for being a non-market economy, the US is itself becoming less of a market economy. The US government imposes tariffs on selected products that it chooses, gives itself the sole power to determine which individual companies can escape the tariffs, subsidizes only certain industries hurt by retaliatory tariffs, and is even talking now of price controls on products hit with tariffs (e.g., aluminum). The US then uses trade negotiations to force trading partners to accept managed trade arrangements in which the government sets wage rates and requires the imposition of export quotas. When the USMCA is notified to the WTO, one can envision Beijing’s representative accusing Washington of acting like a non-market economy.

Click here to go to the previous Founders Broadsheet (“Trump’s trade agreements antagonize allies but are mostly PR”)

Hat tips: Nicomachus and Eaglebeak