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Trump Administration Rattles the North American Cage on NAFTA

October 23, 2017

By Jeff Ferry, CPA Research Director

Three rounds of North American Free Trade Agreement (NAFTA) negotiations came and went without much fanfare. But the fourth round, 

held in early October, included strong Trump administration proposals which start to fulfill promises to get tough on trade.  Mexico and Canada complained about the proposals. The NAFTA negotiations are now looming as the arena for a major international showdown.

Predictably, multinational corporations are howling with rage and fear, worried that they may lose important weapons in their perennial battle to reduce their US costs by shipping jobs overseas and forcing US workers to compete with low-paid foreign workers.  Meanwhile, President Trump has let the media know that he would not be adverse to walking away from the NAFTA agreement if his negotiators can’t bring him a good enough deal.

 The two key NAFTA issues upsetting the free trade coalition of multinationals and the Wall Street financial community are rules of origin for the auto industry and sunsetting.

 Rules of origin state how much of the value of a car or truck must originate in the three NAFTA countries (US, Mexico, Canada) for the product to count as NAFTA-produced. The current requirement is 62.5%. The Trump administration wants to raise that to 85%, and also add a new requirement for the US content of the vehicle to be 50% for it to qualify as a NAFTA-produced vehicle. In the 23 years since NAFTA went into effect, the US auto industry has suffered a loss of jobs and a substantial decline in inflation-adjusted wages, driven in large part by competitive pressure from Mexico. According to a CPA analysis submitted to the US Department of Commerce earlier this year, the real wages of auto production workers have fallen by 27% since 2002. In other industries, the wage declines have been smaller but still significant. The sectors with the biggest declines map directly to the sectors where the most production has moved to Mexico.

The wage disparity between the US and Mexico is glaring. The average manufacturing wage in the US is today $26 an hour. According to reports from Mexico, a Mexican carworker is paid between $2 and $3 an hour. That’s roughly a 10:1 differential. And Mexican wages have shown little tendency to rise in recent years—not surprising considering that labor unions in Mexico are essentially paper tigers controlled by management and the government, and Mexico suffers from ample unemployment. The 10:1 ratio on wages was also cited in a lengthy article in last week’s New York Times documenting the closure and shift to Mexico by Rexnord of a historic Indiana bearing manufacturing plant. In the article the American production worker, highly skilled machine operator Shannon Mulcahy, and her Mexican replacement worked out the ratio of his pay to her pay. Her replacement, Ricardo, determined that Rexnord can employ “ten Ricardos” for “one Shannon.”

A recent Department of Commerce study showed that the non-NAFTA content of US automotive imports from Mexico has almost doubled between 1995 and 2011, the most recent year in which data is available. The non-NAFTA figure went from 14% to 27%. The Administration’s goal is to reverse that trend, and also to increase the share of US content in NAFTA-produced vehicles. This won’t stop the shift of production to Mexico, but it should slow it down. 

Trump administration trade negotiator Robert Lighthizer is pushing for a “sunsetting” clause in NAFTA, requiring the agreement to end after five years unless all parties renew it.  [All business contracts in the US are temporary. Courts will not enforce contracts that are permanent. The reason is that technology, economic conditions, products and many other factors change over time.  Why should trade agreements, which are business contracts between countries,be any different? The federal government should be forced to periodically consider whether an agreement continues to meet expectations sufficient to renew it.

And if a NAFTA agreement cannot be reached, the US should just walk away. Some deals just don’t work out, and NAFTA may be one of those. With a negative trade balance last year of $70 billion, NAFTA has led to a loss of about one million US jobs. If that is not failure, what is?

 


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  • Jeff,

    Lighthizer’s “sun setting” concept begins to move the discussion towards the policy framework I have been arguing for. It introduces the idea that no matter what terms are agreed to in a trade agreement that the results may not be what was desired – thus requiring a new round of political intervention.

    The macroeconomists associated with the CPA have put forward some great proposals for tinkering with the financial markets to help redress our trade imbalances. But none of them has a good word to say about the use of direct political intervention to accomplish the same ends.

    Rather than rely solely upon the periodic review / renegotiation of trade agreements by the Administration in power at any given time, I have sought to establish a distinction between their financial terms and their actual results; i.e. between the ideal representation of the economy and the real, existing economy. Leave the financial terrain for the macroeconomists to fight about and use the political process to put quotas in place that address the imbalances in the real economy.

    The fundamental issue here is that money is a social fiction not a natural physical phenomenon. Hence it ultimately answers to the subtleties of sociology rather than mathematics.

    Macroeconomists refuse to accept that their field of inquiry is a social construct and continually assert their knowledge claims take precedence over the political processes of our democracy. As a result even when the real results of Free Trade are a disaster, our macroeconomists deny that it is so.
  • Ian, in Free Trade Doesn’t Work, you routinely warn of the dangers of this kind of industry-specific trade barrier. It allows industries to buy protection with political contributions. That’s why I agree with you that a flat tariff is the best (least politically manipulable) solution.

    To be blunt: why only automobiles? What’s so special about them? Why not boats, blenders, and beach balls too?

    I am gradually coming to agree with you on the problems with free trade, but posts like this make me wonder whether your allegedly protectionist ideological conviction is really just a desire to protect politically connected friends. Your critics certainly make that claim, and you do yourself no favors in an article like this.