Will Trump’s New NAFTA Deal End Up Doing More Harm Than Good

Throughout his campaign, President Trump relied heavily on the promise that he would create more balanced trade for the United States, which would then result in more domestic manufacturing and more domestic jobs. Unfortunately, the details of NAFTA 2.0 could do just the opposite according to various industry insiders.

Tangentially, many of the newly proposed automobile industry provisions – the crux of the deal – come at the same time that automobile industry is suffering its worst slowdown since the financial crisis, as reported earlier.

Will Trump's New NAFTA Deal End Up Doing More Harm Than Good

There are other nuances: as Bloomberg notes, the new agreement still needs to be approved by Congress and already has critics from both sides of the aisle. Mickey Kantor, who helped usher in NAFTA in under Bill Clinton as his trade representative told Bloomberg “It will cost us jobs,” arguing that Trump was doing it “mainly to fulfill a political philosophy rather than create jobs.”

In a separate analysis, looking at the financial impact of the proposed NAFTA overhaul, Goldman Sachs wrote in a report last night that they “…do not expect the revised terms to have substantial macroeconomic effects in the U.S. if they do take effect.”

Arguing the other side, Kevin Hassett, the head of Trump’s Council of Economic Advisers, disagrees with Goldman:

Kevin Hassett, the head of Trump’s Council of Economic Advisers, says that the White House’s own modeling shows that when the new Nafta goes into effect it will create “many, many thousands of manufacturing jobs” and reduce a trade deficit with Mexico that in goods was worth about $70 billion last year.

“Any way an economist would model this you end up with a big positive shock to manufacturing jobs in the U.S.,” he said in an interview, predicting a flood of capital spending on new plants.

Meanwhile, Trump insists that he is rebuilding the country with his proposed “very special” and “incredible” deal. It’s notable that Trump’s plans are heavily reliant on the automobile industry – where the administration would hope to see a majority of the plan’s rubber hit the road.

A lot of Trump’s proposed changes are to encourage automobile manufacturers to purchase and produce more in the United States.

The main reason to believe that, administration officials say, is the new package of auto content rules that are designed to encourage companies to locate more plants in the U.S. and source more parts from within North America rather than places like China and Thailand.

The new rules will within three years raise the percentage of a car that has to be produced in North America to enjoy its duty-free benefits to 75 percent from the existing 62.5 percent.

The key innovation included is a requirement that 40 percent to 45 percent of that content be made by workers earning at least $16 per hour.

The counterpoint to the automobile industry changes is that, as Bloomberg notes, the plan moves the goal posts for the parts of the new car it applies to. For instance, the 75% of the vehicle that needs to be produced in the US now can come from the entire vehicle, instead of just a specific list of parts. Also, companies are going to be allowed to include their research and development spending and certain SG&A-type costs related to their headquarters into the mix.

Some could argue that Trump’s proposed change are not nearly enough: Kristin Dziczek, from the Center for Automotive Research, told Bloomberg that many cars that are already being manufactured in North America – such as the Honda Civic – already exceed the new requirements and new wage floor, with 70 percent of its content originating in the U.S. or Canada let alone Mexico.

“I don’t think it shifts things a whole lot right now.”

The situation is similar in Mexico, where Economy Minister Guajardohas stated that 70% of Mexican auto exports to the US already meet requirements.

Trump’s critics take the argument further, and claim that the “new NAFTA” will have the opposite of its intended effect. They argue not only that it will raise the cost of cars for consumers, but also that it will act as motivation for people to not produce vehicles in the United States.

Business leaders – who noted that Canada needs to be a part of any new deal – showed a tepid, at best, reception to the new deal. The Trump administration plans on trying to get the backing of automobile labor unions, which they believe can help them secure support from the Democrats in Congress. So far, labor leaders have stated that “more work needs to be done” while remaining on the sidelines.

Collective labor is likewise skeptical: Robert Scott of the Economic Policy Institute, who works closely with labor unions said that “there are a lot of people who have been working very hard on the renegotiation of Nafta, but I don’t think that’s going to bring jobs home in vast numbers. I just don’t see it.” In a statement Monday labor leaders declared there is “more work that needs to be done” on Nafta and people close to the unions are still wary.

“There are a lot of people who have been working very hard on the renegotiation of Nafta,” said Robert Scott of the Economic Policy Institute, a Washington think-tank that draws some of its funding from labor unions. “But I don’t think that’s going to bring jobs home in vast numbers. I just don’t see it.”

All of the above could be moot if the Republicans lose control of the House: Congressional politics for trade deals are especially difficult, as they have been since Nafta first was ratified in 1993. If Democrats gain control of the House of Representatives in November’s mid-term elections – as they most likely will – would the party’s leaders really be ready to bring the new deal to a floor vote and give Trump a win?

Will Trump's New NAFTA Deal End Up Doing More Harm Than Good

The potential political pushback has not daunted Robert Lighthizer, who as Trump’s U.S. trade representative has been leading the negotiations, and pitched the Nafta efforts as a way to rebalance the politics of trade and build a grand coalition to back not just Nafta but other future trade pacts as well. And, for the time being, that effort is on track as far as Lighthizer is concerned.

“I’m not going to worry about the votes at this point,” he told reporters on Monday. But “my expectation is that it will pass overwhelmingly.”

Of course, it could all be just a negotiating ploy by Trump, to show the world that multilateral trade agreements can be done one nation at a time: as we discussed yesterday, the heat is already on Canada – devoid of bargaining capital after Mexico “defected” in the game theoretical negotiation – to reach a quick and amicable deal. Even if this particular attempt to rebuild Nafta fails to achieve what is meant to do, should Trump succeed in getting all participants to sign on the dotted line, it will serve as a framework for all of Trump’s future trade deals. Assuming, of course, that Mueller doesn’t get to Trump first.
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Author: HEDGE

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