At first sight, the announcement of a new trade pact between the United States and Mexico seemed a triumph for President Donald J. Trump. And the announcement made on Sept. 17 of another round of tariffs, targeting $200 billion's worth of Chinese imports, allowed the U.S. president to claim his country now had the advantage over China.
There is some truth in that, but very little.
A good many economists agree that the crescendo of new tariffs will hurt the Chinese more than the U.S. economy. The 10% tariffs on $200 billion of Chinese imports could rise to 25% by the end of 2018. The Chinese reacted quickly, slapping tariffs of 10% on $60 billion worth of imports from the United States.
If its tariffs are considerably inferior, it is because China exports far more to the United States, making it much more vulnerable to any trade war.
The investment banks Bank of America, Merrill Lynch and J.P. Morgan estimate that if these tariffs were raised to 25% later this year as threatened, China's economy could lose between 0.5 and 0.6 points in its 2019 growth rate. The IMF expects the Chinese economy to grow 6.6% this year and 6.4% in 2019. This growth and its consequent demand for raw materials, has been an engine for emerging economies since the turn of the century, so any break on it would be bad news for Latin America.
At a car assembly line in Puebla, Mexico — Photo: Susana Gonzalez/DPA/ZUMA
Certainly, China is an aggressive trader worldwide and doesn't always respect rules in areas like patents and intellectual property rights, but Trump's attack has more to do with protecting manufacturing than defending U.S.-based innovation. The retailer Walmart has written to President Trump to warn of the grave disruptions his tariffs will cause their supply chains — and the higher prices customers may end up paying. The chain identified more than 30 products that may suffer in particular including bicycles, USB cables, AC equipment and futons.
With the trade deal just cut with Mexico, the big product that will suffer is her royal majesty: the automobile. Trump can say without having to lie that the new deal favors the United States as it removes incentives for firms to move to or stay in Mexico. The deal stipulates that for a car to be sold in the United States without tariffs, 75% of its components must be made inside the United States — compared to 62.5% with NAFTA. And 40% of the production inside the United States must be in plants where workers are paid at least $16 an hour.
This may be good for workers, but clearly, cars will become more expensive for the U.S. buyer, while also pushing down the wages of Mexican workers. The U.S. market has benefited from cheaper cars made in Mexico for 20 years now, so Trump's victory means higher wages for U.S. car workers and less money in the pockets of all the other Americans who will buy more expensive cars.
It is a trading regime to restricts free trade.
Trump had promised to renegotiate NAFTA while campaigning for the White House, and the deal comes just before mid-term Congressional elections. But it is a Pyrrhic victory. It is a trading regime that restricts free trade, and establishes a new order that harms Mexico, directly and immediately. It may serve Trump for the mid-term elections, but its details contain all the difficulties it entails for the three NAFTA signatories.
Firstly the "new NAFTA" says nothing about steel or aluminum. Since June, the United States has been charging 25% on steel and 10% on aluminum imported from Canada and Mexico. These were imposed purportedly to protect national security. Mexico and Canada have complained to the World Trade Organization, though the Trump administration has already uttered threats to leave the WTO.
The U.S.-Mexico deal now includes Canada, and the countries' legislatures must also approve any such deal and there is no assurance yet that Republican legislators that favor free trade — and they still exist — will back Trump's deal.
A further complication with Mexico is that its laws require trade agreements to be examined for 90 days at least between submission to Congress and signature into law. Both the Trump administration and the outgoing President Enrique Peña Nieto want the treaty in force before the next presidency begins. But a new, three-way pact to replace NAFTA and in force before Dec. 1, when the socialist Andrés Manuel López Obrador takes office, looks improbable.
The new, restrictive deal is as harmful to North American free trade as tariffs on China are to global trade. And behind it all there is but one name: Donald Trump.
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