Politically Managed Trade: Trump Took "Worst Deal in History" and Made It Worse
Mike Mish Shedlock
For Starters There Is No Deal
Diving further into the "great" trade deal, we find that it really wasn't so great.
The Wall Street Journal says in many ways it's worse than before. Bloomberg accurately calls it a "lemon".
Heck, we find there is no deal at all, for two reasons.
Mexico's trade minister says whoa, Bilateral Tweaks Needed Without Canada.
> Mexico’s Economy Minister Ildefonso Guajardo said on Monday that the trade accord it announced on Monday with the United States would have to be tweaked, particularly regarding rules of origin, if it ends up as a bilateral agreement without Canada.
> If Canada opted out, some parts of Monday’s deal would have to be redesigned such as auto content rules.
> “The whole issue of rules of origin is considered trilaterally, so if we go forward with a bilateral model it would need to be rethought,” he said. “It’s not the same having integration between three countries as two.”
Does that sound like a done deal? I suggest not.
One of the provisions of the deal had me scratching my head.
Head Scratching Provisions
> The agreement waters down a part of Nafta that gives multinationals extra legal protections when investing overseas by allowing them to file complaints against the home governments in special NAFTA-run arbitration panels, rather than having to rely on local courts.
> “This new agreement would curtail fundamental protections against expropriation, arbitrary and discriminatory government conduct, protection of long-term project contracts, rights to repatriate profits and capital, and the right of investors to enforce their rights in neutral arbitration tribunals,” said Daniel Price, a top trade official in the George W. Bush administration, who had helped create and promote those investor protections as a U.S. negotiator.
> “This is a dramatic reversal of longstanding U.S. policy supported by successive administrations,” Mr. Price said.
Half a Nafta
The Wall Street Journal blasted the deal in Half a Nafta.
U.S. Trade Rep Robert Lighthizer used the desire of Mexican President Enrique Peña Nieto to sign a deal before he leaves office to raise the negotiating pressure on Canada. Mr. Trump implied Monday that either Ottawa signs on or he’ll slap a 25% tariff on cars made in Canada.
Canada handled that threat with prudent restraint, praising the U.S.-Mexico “progress” and offering to rejoin trilateral talks this week. Mr. Trump griped Monday with cause about Canada’s dairy protection, but Canada is right to want to retain Nafta’s Chapter 19 provisions that provide a way to settle trade disputes by a special tribunal.
Another problem, a large one, is that the bilateral deal strips current protections from most U.S. investors in Mexico. Oil and gas, telecom and power-generation investors will retain what they now have. Others will be protected only against physical expropriation.
But countries other than Venezuela are smart enough not to send in the police to occupy a plant or hotel. They’ll use regulation to favor domestic competitors. Believe it or not, this was a Trump-Lighthizer demand: Why make it harder for U.S. firms to court customers abroad?
The deal also imposes new red tape and costs on the auto industry to punish imports. The deal says that to get tariff-free treatment cars sold in North America must have 75% of their content made here, up from 62.5%, and at least 40% of the content must be made with workers who earn $16 an hour.
This auto gambit is part of the Trump-Lighthizer strategy to blow up global supply chains, and it is a political strategy to get a revised deal through Congress. The details still aren’t clear, but Mr. Lighthizer said Monday those rules will be “enforceable” on Mexico as part of the new deal. [Mish comment: Enforceable without Chapter 19 provisions?]
Mr. Lighthizer has quietly courted Ohio Democrat Sherrod Brown and protectionist Lori Wallach of Public Citizen during the negotiations. He’s betting that helping the AFL-CIO unionize more of Mexican industry will coax Democrats to support a new Nafta. Good luck with that. No trade deal has passed in recent decades without a preponderance of Republican votes. Democratic leaders in Congress have fought every one.
Lemon by Any Name
Bloomberg takes a peek under the hood and says Trump’s Mexico Trade Deal Looks Like a Lemon.
> A car can look like a fantastic bargain on the lot, only to reveal itself as a lemon when you drive it away. It’s not so different with trade agreements.
> Based on the NHTSA’s data, there are just three models made in Mexico that are currently exempt but would attract tariffs under the new regime: Nissan Motor Co.’s Versa Sedan, Audi AG’s SQ5, and Fiat Chrysler Automobiles NV’s Fiat 500. Of these, only the Versa sells more than a handful of models in the U.S., with 106,772 vehicles shipped in 2017.
> The wage rules are likely to be tougher, though even there the devil is in the detail. Almost all non-Nafta content in Mexican-made cars sold in the U.S. comes from Germany, Japan or South Korea, where total compensation typically takes pay well above $16 an hour. So unless the requirement relates solely to Nafta workers earning at least $16 per hour (full details haven’t been released yet), the rules will only really affect vehicles that are at least 55 percent made in Mexico.
> That’s a similarly small group.
Bloomberg provides lots of charts and extra details, concluding:
> It shouldn’t be all that surprising that this deal is more limited than it first appears. Mexico is scarcely going to agree to devastate its domestic industry to please President Trump.
Deal, What Deal?
Not only does Mexico have bilateral "tweak" concerns, it is not up to Trump to approve the deal. Congress needs to do that.
And who is the winner right now were that to happen?
Quartz says Canada Wins in Trump’s NAFTA “Deal” with Mexico.
> NAFTA, Trump said again today (Aug 27), was a “ripoff,” and Canada would have to scramble to to negotiate to join the new deal—which he dubbed the US Mexico Trade Agreement—or face tariffs on all cars it exports to the US.
> “We’ll give them a chance to have a separate deal, or we could put it into this deal,” Trump said.
> It sounds bad for Canada, but what, exactly, have the US and Mexico committed to? Less than it looks like, trade experts say.
> In fact, the negotiations with Mexico aren’t yet finalized, the US Trade Representative confirmed later. The US’s top trade representative, Robert Lighthizer, is expected to file documents Aug. 31 that would include specifics.
> Then Congress has 90 days to read and approve the details, thanks to Trade Promotion Authority rules, a process that could extend past the contentious mid-term elections. There’s no guarantee Trump’s Republicans will hold its majority in the House.
> Any changes to NAFTA deal require Canada’s approval, as foreign minister Chrystia Freeland’s office pointed out. Freeland, who is traveling to Washington DC tomorrow (Aug. 28) to continue negotiations, “will only sign a new NAFTA that is good for Canada and good for the middle class,” her office said. “Canada’s signature is required,” for any renegotiation, it noted.
> Trump’s threat that he will tax car imports unless Canada agrees to lower tariffs on dairy products appears to be an empty one. Canada doesn’t have any major homegrown vehicle brands. Many of the cars made there last year were models made for the US’s big automakers Ford, GM, and Chrysler, according the Canadian government
There was far less to meet the eye in this allegedly great deal than announced.
In fact, it smacks of desperation to get something, anything done at all.
Politics. The Midterm elections are coming up. Not only are businesses screaming, at least five Republican senators blasted Trump over trade.
In Mexico, president Pena Nieto leaves office on December 1. It's the leftist AMLO's party that now controls the Mexican senate, which needs to ratify the agreement.
As part of the package, Trump wants U.S. to Pay Farmers $4.7 Billion to Offset Trade-Conflict Losses.
Are they happy? Not quite.
> The National Corn Growers Association estimated lower prices as a result of tariffs will cost growers more than $6 billion this year. The direct payment program allocated $96 million for corn growers.
> “This plan provides virtually no relief to corn farmers,” said Kevin Skunes, the association’s president and a North Dakota farmer.
> USDA’s “tariff mitigation plan falls far short of addressing the losses dairy producers are experiencing,” said Jim Mulhern, chief executive of the National Milk Producers Federation. The group estimated the $127 million allotted to dairy represented less than 10% of what producers have lost during recent trade disputes.
> “No farmer is going to come close to being made whole by anything that USDA has proposed as a response to the decrease in price due to trade restrictions,” said Sen. Roy Blunt (R., Mo.). “Farmers have to hope that the government continues to work to open more markets.”
The alleged "deal" is nothing more than political grandstanding.
Mexico questions the deal if Canada does not partake, and Congress, not Trump, has the final say.
In an effort to stop Congressional hemorrhaging, Trump tossed a bone to the farm states, but most are still unhappy.
Kowtowing to unions is precisely the wrong thing to do economically, yet that is what Trump did with the wage provisions.
Trump took the "Worst Deal in History" and arguably made it worse.
This we call "winning".
Mike "Mish" Shedlock