Bidding Farewell to NAFTA and a look at USMCA
Looking behind the smoke and mirrors of Trump’s North American Free Trade Agreement abolishment…
The night of November 30th, 2018 was a significant milestone for the Trump administration. President Trump hailed triumphantly as he abandoned the 24-year-old North American Free Trade Agreement, or as he denounces a ‘disaster’ and ‘the single worst trade deal’ in history.
History and legacy of NAFTA
(Source: NY Times)
The NAFTA was a 3-way pact ensuring a tariff-free trading zone for most goods between the US, Canada and Mexico. It was previously implemented by President George HW Bush, and was founded on the basis that integration would encourage economic growth and prosperity through frictionless inter-border trading. Indeed, according to Reuters, since 1994 trade has quadrupled among the countries, exceeding $1.2 trillion. Its positive impact was visible in Mexico as the influx of auto-manufactured jobs created led to increased productivity in the region. Canada also experienced a boost in its agriculture industry and profited from cross-border investment. However, the impact NAFTA has had on US labour forces is questionable: blue-collar industries that are highly reliant on manufacturing, particularly in states like California, Michigan and Texas, suffered massive losses of over 700,000 jobs due to a shift of production to Mexico. Almost 5% of dislocated US workers could be traced to rising Mexican imports. Similarly, Mexico's GDP rose by a mere 1.3% yearly yet unemployment rates ascended at the beginning of the 2000s. Poverty and living standards remain stagnant, and the country’s dependency on food imports received backlash from domestic farmers and workers.
The Hype of USMCA
The successor of NAFTA is the United States-Mexico-Canada Agreement, more commonly referred as the USMCA. The new deal incorporates various changes, including higher requirements for cars to qualify for zero-tariffs, a larger granted share and access for the US in the Canadian dairy market, increased labour and environmental markets, and in many areas that will benefit all 3 economies. Specifically, the continuation of Chapter 19, which hears anti-dumping and countervailing duties cases, and the prohibition of Trump setting auto-tariffs grant Mexico and Canada the ability to challenge and resist US trade monopoly.
However, from a wider outlook the biggest winner emerging from USMCA is the United States, namely President Donald Trump. In particular, the political implications of the USMCA by far supersede America’s economic gains.
This can firstly be seen by scrutinising the individual agreements in the new deal: the clause of increasing labour rights would appeal to American lower class, domestic blue-collar workers. In the NAFTA era, the majority of them were battered by severe economic losses due to a decline in the manufacture employment, because of the development of technology; it is estimated that over 1/3 of US manufacturing jobs evaporated from 2001 to 2009. The phenomenon was exacerbated by the rise of automation, artificial intelligence and machinery in the late 20th century, and this trend is predicted to continue in the span of merely 10-years-time. The entrance of global competitors with lower production costs - China into the World Trade Organisation in 2001 also proved to be a threat to American exports, having overtaken the US as the largest manufacturer in the world in 2011. These culminated reasons caused them to align to Trump, the fresh-blood whose 2016 presidential campaign vowing to ‘Make America Great Again’. In particular, he heavily advocated the importance of job preservation in the manufacturing sector and venerating qualities of this ‘dying’ industry. Thus, the USMCA is seen as a move by Trump to secure his popularity among some of his biggest voters and supporters, i.e. conservative workers demanding more tax-cuts and deregulation; who are dissatisfied with the loss of their political identity and representation in a society of unequal wealth distribution and overwhelming globalisation; who truly believe in the ‘American Dream’, echoing Trump’s fundamental values. American workers will likely remain loyal to Trump given America’s economic optimism: unemployment is at its 50-year low of 4% and a booming economy, where GDP soared up to 4.2% by the second quarter of 2018- an indication that perhaps Trump’s protectionist and nationalism-directed approach to the economy is performing well.
Looking through global lenses…
On a macro scale, the USMCA is seen as a foreign policy capital and victory for Trump. The 25% steel tariffs imposed on Canada by Trump currently remain intact in the USMCA. There is no timeline of when tariffs will be removed, in which Canadian Prime Minister Justin Trudeau condemned as ‘insulting and unacceptable’. This secures Trump’s upper hand position of using tariffs to renegotiate US trade deficit with foreign countries. Furthermore, increased intellectual property (IP) rights and America’s efforts to protect trademarks and patents in biotech, financial services and domain names in the USMCA also reflect increased efforts to rectify a wider problem in American society. IP theft has enveloped the US economy in the past decade due to the rising Asian dragon: China. China is responsible for the US’ bulk of $376 billion deficit when comparing the number of exports from and American imports into China. It is an obstacle that Trump, unlike his previous predecessors, is willing to address by escalating a trade war.
On the other hand, the USMCA settlement plays an important role in this period of economic tension and hostility. The trade agreement is very atypical of Trump’s usual style of isolationist foreign policy: having had the US pull out of the Trans Pacific Trade Deal, and by condemning the NATO as ‘foes’. Perhaps, the re-branding of NAFTA is a signal that the US is taking advantage of its geographical ties and is making headway with its biggest partners of close proximity like Mexico and Canada without China. Comparing to Trump’s blatant tariffs on China, USMCA is not only an attempt to retaliate against China’s unfair ‘rape’, quoting Trump, on the American economy, but another step to strengthen America’s network of political allies in order to detach and isolate the Chinese economy in all ways possible. The multitude of bilateral trade agreements Trump has signed with his Southeast Asian counterparts e.g. Japan and South Korean further support this point and demonstrate how Trump’s play of geopolitics is gradually extending closer to China, hence an endeavour to put China in a vulnerable position.
What Does It Mean?
Fundamentally, the USMCA is seen as a win-win political gesture that Trump has orchestrated. Not only does it pacify his own domestic supporters and is an evidence of his economic achievements since coming to office, the USMCA subtly asserts America’s dominance in world economy. It is Trump’s attempt to tame the rising Asian dragon, and ultimately a reminder of ‘America First’ to the rest of the world.