Nothing characterised Donald Trump’s presidential campaign more than his penchant for making new deals, after tearing apart or renegotiating existing ones. Be it the nuclear agreement with Iran or brokering better terms of trade with China, no one was safe from verbal wrath.
Not even the North American Free Trade Agreement, an almost 30-year old pact that ensured free movement of goods between the US, Canada and Mexico. The agreement had led to thousands of job losses, Trump said, as many US companies shifted their production to Mexico where the costs are lower. The same goods were then imported from there, leading to a trade deficit – something the US president hates with all his heart.
But earlier this week, the three North American countries finally reached another agreement in place of NAFTA, which the US says “will create more balanced, reciprocal trade that high-paying jobs for Americans” when finalised and implemented.
Trump had time and again complained about US companies moving their manufacturing to Mexico due to cheaper cost of production, resulting in American workers losing their jobs, especially in the auto sector where giants like Ford had relocated much of their factories across the border. The new pact addresses this issue by requiring that 40-45% of auto content be made by workers earning at least $16 an hour.
This would push up the labour costs in Mexico and discourage US firms to shift manufacturing, or at the very least, ensure a higher wage for American workers involved in the sector. According to a report from the Trump administration, the new deal is expected to create over 76,000 auto jobs over the next five years, while the International Trade Commission puts that figure at 28,000 in a period of six years.
It further requires Mexico to overhaul its labour justice system, by adding legislative actions that the country must take to provide for the effective recognition of collective bargaining rights. Another key feature is the proposed dispute settlement mechanism, which will ensure the enforcement of core labour standards in Mexico.
The three countries have also committed to reducing trade distortions, for example by not using export subsidies or WTO special agricultural safeguards for products sold to each other’s markets.
Another bone of contention for the Trump administration was regarding the tech sector, and the new deal explicitly prohibits Canada and Mexico from requiring US companies to host data of their citizens inside their borders. The agreement further lays a roadmap for digital trade, ruling out the application of customs duties on digital products distributed electronically such as music, software etc.
However, overall the differences are not that many and might not justify the hype afforded to the entire politics leading up to this agreement. The new deal surely does a good job at addressing key points regarding data and digital trade in an ever-advancing technological world, but in the traditional sectors, the changes have been rather marginal.
As for the benefits it will reap, there are differing views but even the most generous projections do not add too much to the US economy in terms of investments and jobs. However, now that the matter is hopefully settled once and for all, with backing from House Democrats as well, it will go a long way in boosting investor confidence and tackle the uncertainty that had plagued North American trade.
Similar results to expect with China?
Now that a breakthrough has been made, with core US demands accepted, many might naturally be wondering if the Trump can score a similar “win” against China or other partners as well. But the underlying fundamentals suggest a different picture.
Unlike the European Union or China, Canada and Mexico didn’t have too much leverage to bargain given their disproportionate dependence on the US for trade. For example, both had their exports to the United States accounting for 70% of the total proceeds while imports also had close to a 50% share. On the other hand, the two neighbours represented a cumulative 27% of the United States’ trade value.
Meanwhile, the people’s republic has far more diversified trading partners with 20% of its exports directed towards the US and only 8% or so imports originating from the same. Over the years, China has expanded its trade base to virtually every part of the world, thus eliminating too much dependency on any one country. In addition, its rapidly growing economy offered American companies cheap suppliers and thus became a central part of their supply chains.
As a result, the US doesn’t enjoy the same bargaining power with China as it did with its neighbours and hence, won’t be able to dictate the terms of any agreement reached between the two countries.