It is good news that the United States and Mexico have reached an agreement to modernize trade between the two countries. The two sides promised, among other things, to avoid barriers to alcohol exports—but let’s not break out the tequila in celebration just yet.
About the best you can say at this point is that the U.S.-Mexico deal eases some of the trade hostilities between the two countries and could signal a more positive diplomatic relationship. That’s what stock markets in the United States, Mexico, and Canada reacted to on Monday, posting big gains.
But it is hard to know how this agreement with Mexico might affect businesses and the U.S. economy. The Office of U.S. Trade Representative distributed a brief fact sheet filled with laudable goals but few specifics, and it could easily turn out that the political value of claiming victory in this trade negotiation outweighs its actual economic benefits.
The push for a North American trade pact began early in the Reagan administration and continued through the first Bush administration. President Clinton signed NAFTA in 1994, reflecting what was then a broad bipartisan consensus that freer trade benefits those countries that engage in it. NAFTA wasn’t pure free trade, of course—the three countries still imposed a lot of barriers, and there were a lot of rules. The Foundation for Economic Education noted at the time that the agreement consisted of the 741 pages of the treaty, the 348 pages of annexes, and 619 pages of footnotes and explanations.
It makes sense to update NAFTA after 24 years. The changes announced will strengthen measures to protect intellectual property and expand financial services and digital commerce. Some of the measures were included in the Trans-Pacific Partnership, which Donald Trump disparaged as a candidate and abandoned as president. They are important in 2018.
The Trump administration insisted on increasing the percentage of auto components needed for a car to qualify for tariff-free treatment and minimum wage requirements for those conducting auto assembly. This will discourage Mexican auto factories from importing inexpensive Chinese parts, assembling them on the cheap, then shipping them over the border—but it will also complicate global supply chains and probably raise the cost of automobiles.
Whatever Trump might claim via Twitter, it’s clear that he backed off some of his goals to reach a deal on the auto issue. U.S. negotiators caved on their original demands regarding reauthorization of the agreement and dispute settlement. Less clear is whether we got rolled on energy by Mexico, whose incoming government apparently added late demands that would complicate opening the country’s energy sector to U.S. investment. Yet, this how real-world negotiations work, with each side moving from its initial positions to achieve a deal. It’s an agreement both sides can live with, not a one-sided, Art-of-the-Deal masterstroke that results in Mexican capitulation akin to the Treaty of Guadalupe Hidalgo.
Then there’s the question of Canada. The administration chose to resolve thorny issues with Mexico first, then present the deal to Ottawa as a fait accompli. With the Trump threat of new tariffs on auto parts looming, the Trudeau government will be under pressure to sign on while finding a way to avoid appearing to capitulate. Trump threatened to withdraw from NAFTA and sign a bilateral deal with Mexico, leaving Canada in the cold,. But nobody seems to be taking that threat seriously or literally because it would be an economic catastrophe for the many U.S. companies that depend on Canadian trade.
Mark Zandi, chief economist at Moody’s Analytics, had it right when he told CNBC that the agreement appears to be “much ado about nothing.” He continued: “It won’t materially change the U.S.-Mexican trade balance or increase trade between the two countries. Like the trade deal with the E.U., the U.S.-Mexican deal is a face-saving way to cool the brinkmanship. It doesn’t move the dial for either the U.S. or Mexican economies.”
But don’t be surprised in the coming months if you hear claims this new deal is the toughest one ever imposed on Mexico—so tough and so lucrative that it pays for a wall on the U.S. southern border.
