The United States and Canada are under pressure to reach a deal to preserve a trilateral North American trade agreement. Although the new U.S.-Mexico trade agreement is flawed, the United States must do everything it can to maintain a trilateral trade deal.
Moving from the North American Free Trade Agreement, which promotes regional cooperation and economic integration, to a bilateral trade agreement with only Mexico that increases barriers to trade would be a mistake.
President Trump’s trade strategy has been to impose tariffs and renegotiate or withdraw from trade agreements in order to lower our trade deficit. This strategy is misguided on several fronts. First, a widening trade deficit is positively associated with economic growth, as imports are more valuable to consumers than exports.
Second, trade agreements work. To see this, one only needs to look as far as NAFTA, which has yielded economic benefits including job creation, supply chain integration, expanded market access, and consumer savings. If the United States, Canada, and Mexico revert back to World Trade Organization tariff rates, U.S. businesses would be exposed to $15.5 billion in new tariffs, 14 million U.S. jobs would be jeopardized, and nationwide consumer prices could increase by up to $7.1 billion per year.
Third, tariffs harm the American consumer. Research finds that the president’s new tariffs have the potential to increase nationwide consumer costs by nearly $60 billion per year.
The Trump administration’s negotiating strategy has resulted in the proposed U.S.-Mexico trade agreement. While President Trump is hailing it as “the largest trade deal ever made” and “an incredible deal for both parties,” this deal does not make the United States better off. Apart from new provisions eliminating barriers to e-commerce, which were taken straight from the text of the Trans-Pacific Partnership, and increasing the de minimis threshold from $50 to $100, the deal fails to lower trade barriers. Furthermore, the United States did not agree to reverse recent national security tariffs on steel and aluminum from Mexico, which may cost U.S. consumers up to $650 million per year.
The U.S.-Mexico trade agreement also contains controversial provisions that present barriers to Canada entering into the agreement. One of those provisions increased the amount of a vehicle that must be made in the United States or Mexico. The “rules of origin” requirements will disrupt efficient supply chains, driving up the cost of these automobiles, or force manufactures to move their operations overseas. Another provision would require 40 to 45 percent of auto content traded between the United States and Mexico to be produced by workers earning at least $16 per hour. To put this into context, the average hourly wage of manufacturers in Mexico is $2.30. This provision will either stifle trade, cause prices to skyrocket, or both. Presumably, Canada must accept similar rules — which it has resisted — before joining the agreement.
Further, the U.S.-Mexico negotiations weakened current mechanisms to settle trade disputes. It eliminated what is currently Chapter 19 of NAFTA, which allows nations to challenge unilateral duties placed on their exports. It also significantly weakened Investor-State Dispute Settlement, a mechanism enabling investors to pursue arbitration with governments that discriminate against them. Without effective dispute settlement, foreign and domestic businesses may not have the confidence to expand, participate in trade, or invest in the United States.
The U.S.-Mexico deal certainly is flawed, but if NAFTA is to be renegotiated, it would be better to include Canada than move to a bilateral deal with only Mexico. Canada is the United States’ second-largest trading partner: Over 50 percent of goods traded between the two nations are traded under NAFTA rules. Negotiations with Canada have been derailed by disagreements surrounding dispute settlement and the Canadian government’s protection of dairy farmers (which is uncannily similar to U.S. protection of sugar producers). These disagreements must be overcome. Reverting to WTO rules for trade with Canada could increase tariffs, increasing nationwide consumer prices by $2.8 billion per year.
If Canada agrees to join the United States and Mexico in the new trade agreement, the fundamental problems with the newly negotiated pact would remain. Nonetheless, having a trade deal with Canada — even one arguably worse than NAFTA — is better than no deal at all.
Jacqueline Varas is the American Action Forum’s director of trade and immigration policy.
