Trump’s NAFTA strategy: bluff, rebrand, declare victory

To assess Trump’s victory, it’s essential to recall that he didn’t start from nothing. President Barack Obama also came to office promising to renegotiate NAFTA. In fact, he essentially did. His TPP deal included both Canada and Mexico, covered many of the same areas the new NAFTA proposal does, and brought in nine other countries. Trump dropped TPP in favor of negotiating sequentially with Mexico and then Canada, but ended up in a similar place. “What is known about the agreement so far shows only modest changes,” wrote the economist Tyler Cowen.

The new NAFTA proposal does diverge from TPP in at least one crucial way, however: It makes North America’s vast automotive trade less free. Two provisions in the proposed deal make the difference. First, it tightens NAFTA’s already strict “rules of origin,” regulations that require most of a given car’s component parts to come from North America. Second, it requires that a big chunk of the car be built by workers making a minimum wage that’s set higher than what Mexican auto workers currently make. Only if both of those conditions are met will the cars avoid the default 2.5 percent tariffs the U.S. imposes on cars from other countries. The Mexican government estimates that 70 percent of its U.S. automotive exports will meet the two conditions. In other words, the new NAFTA rules would require auto manufacturers to jump through hoops in order to avoid a fairly small tariff. Some simply won’t do it. Those that do will pass their costs on to consumers. What does all that amount to? Simply put, car prices will rise.

The TPP would have gone in the other direction. The rules negotiated by Obama, and rejected by the Trump administration, would require fewer local parts, not more, in order for a car to avoid tariffs, and there were no similar provisions for minimum auto wages. That was a big political problem for the deal. “The TPP will create more incentives for companies to move operations to low wage countries,” the leaders of the United Automobile Workers declared in 2015. Now Trump’s new deal has the autoworkers union intrigued. In a statement with other major unions Monday, the UAW said it was waiting for more details but generally saw the NAFTA talks as “on track.”

The contrast between the two deals is revealing. Robert Lighthizer, the former steel lobbyist who serves as chief negotiator in his role as U.S. trade representative, has testified that his goal is to bring manufacturing back to the United States. The new NAFTA deal shows the lengths he’s willing to go to do that. The new rules deliberately make trade in cars less free, in order to shelter American jobs. “It's not clear to me how you could characterize their goal as anything other than protectionism,” said Simon Lester, a trade-law expert at the Cato Institute.