Wednesday, August 29, 2018

Marrying NAFTA and The TPP: The "US-Mexico Trade Agreement"

I really am not sure where to begin with this latest farce, Trump's announcement yesterday of a supposed US-Mexico Free Trade Agreement.  Of course there was the farce of him trying to make the announcement with a live phone call between him and outgoing Mexican President Pena-Nieto (to be replaced on Dec. 1 by leftist populist Obrador), which took awhile to get going.  There is the problem that some details appear to be unresolved, but most importantly that Pena-Nieto insisted four times that Canada needed to be part of the deal for it to be accepted in Mexico, including with his last words to Trump, while Trump seems fine with just having a tow-nation deal leaving Canada in the dust, or perhaps hoping that Canada will simply be forced to sign onto this deal as is, which it might.  But for Congress to approve it prior to Obrador coing into office, given Congress's 90-day waiting period on such legislation, Trump has four (now only three) days to get Canada to sign on.  Prospects for that and Mexico also passing it before Dec. 1 do not look too good, maybe not much better than the prospects of actually getting North Korea to denuclearize.

So what is in this deal?  Most of the publicity has been about its automobile section, which some in the US hope will increase automobile production in the US, although that is not definitely the case.  The two main parts are to increase the  portion of parts made in North America from 62.5% to 75% in order to avoid facing tariffs.  This apparently would affect Toyota, Nissan, and Mazda most severely, but hardly any other  non-North American producer.  Maybe some of those companies might shift some production to North America, maybe at least production of parts, but there is no reason to believe any such increase will go to the US ra4ter than to Mexico, although probably some would.

The other part is that at least 40-45% of production must come from workers earning more than $16 per hour. Offhand that looks like it might help US workers.  However, average US auto wages are $22 per hour while Mexican average auto worker wages are $10 per hour.  This may help Mexican workers get higher wages, but it is not obvious it will do much for US auto workers.

Of course this is the big  stick Trump is using on the Canadians: if they do not get on board with this agreement, they will face tariffs... But this is a potential mess given the complicated supply chains between the Canadian and US auto industries, and it is notable that the US auto industry has not supported imposing tariffs on foreign cars, precisely because of this.

Trump wants to rename the agreement as "NAFTA" supposedly has "bad connotations."  Well, why would it not with him having repeatedly denouncing it as "the worst trade deal ever"?  But the hard fact is that it is still legally in place, and apparently he cannot unilaterally just end it.  Congress must approve, and apparently there are many in Congress not willing to do that without Canada being in place for any replacement agreement.  Trump can call it whatever he wants, but at best this is a minor change in the still-existing NAFTA.

Now as a matter of fact there  are some parts of this agreement that look like improvements.  These would include tightened environmental and labor union rules for Mexico, as well as stronger property rights protections for US intellectual property, although some would question if this latter is really so great: making Mexicans pay more for US Big Pharma drugs?  Also, the bottom line of the auto part of this would raise car prices for consumers in both nations.

However, here is the great irony.  Both Mexico and Canada have already agreed to these environmental, labor, and intellectual property rights rules. They did so when they signed on to the Trans-Pacific Partnership (TPP) agreement, which in fact both of them are still parties to.  Trump removed the US from this almost immediately after becoming president, also denouncing the TPP as something just awful, even though the US led the negotiations for it to come about.  So the US is out of it, but all the other 10 nations, including both Mexico and Canada, have followed Japan's leadershp to continue  with the agreement and make it happen.  So accepting these conditions on the part of Mexico was not a big deal at all. They have already done so, just not with the US.

Which leads us to a bizarre bottom line.  With NAFTA actually still in place, and with these portions of this agreement already in place for Mexico (and for Canada if it joins in) in the TPP deal, this makes rhis agreement basically a marriage bwtween NAFTA and the TPP, both agreements that Trump has denounced, but now he is keen on a combination of them. The only part of it that cannot be characterized as that is the automobile part, but if Canada does not go along with that, the whole thing will probably end up going kaput anyway, much like the North Korean denuclearization.  But, hey, globla stock markets rose on the news, presumably on the grounds that it means Trump may be less likely to initiate a full-blown global trad war in the near future, whatever becomes of this odd possible NAFTA-TPP going by whatever new name.

Addendum, next day: I have removed the erroneous "Free" from Trump's proposed title of the agreement, with Mexico not yet accepting this title. Also, I corrected an error regarding the percentage parts requiring higher paid workers. It is 40-45%, not 50%.

Barkley Rosser


Anonymous said...

Excellent and needed by at least me.

Anonymous said...

"...Mexican average auto worker wages are $10 per hour"? Is that documented somewhere? Most sources cite $2.25-4)hr.

Soon enough Obrador will want to build St. McCain's "dang fence" himself to deter undocumented gringos.

Anonymous said...

Picture the latest gadgets available in 1992/3 laid out on a table. Big cell phones, bag (cell) phones, VHS players (the DVD came along in 1995), fax machines, dot matrix printers, etc. When NAFTA was crafted back then why was no provision made to sunset the agreement after X number of years? Do we really think a 25 year old treaty regarding manufacturing is as relevant today as it was then? Common sense and logic dictate the treaty should be re-visited at some point in time.

Barkley Rosser said...

On the matter of Mexican auto worker wages, I have double checked. Some sources were putting out this $10/hour number, and maybe that is true somewhere in Mexico, but it looks like for assembly plants the average is more like $8 while it is more like $4 in auto parts plants. There are probably some plants paying lower.

One estimate floating around out there is that about 30% of Mexican auto-related production exporting to the US will have to make some kind of adjustments to avoid tariffs. An ironic possibility is that if doing so costs too much, they may reduce imports from the US and outsource more to China or whatever for parts and just accept having the default tariff of 2.5% imposed. That would reduce production and employment in the US in the sector. This is an actually possible outcome of this deal.

Anonymous said...

Paul Krugman‏ @paulkrugman

By far the best explanation of whatever it is Trump sort-of negotiated with Mexico. Read @ChadBown for the real analysis; I just have a few further thoughts 1/

Chad P. Bown @ChadBown

1/ OK, I am going to try to explain this potential tariff on "non-conforming" autos (in a Tweet)… *


6:12 AM - 28 Aug 2018