Source : THE AGE NEWS
US President Donald Trump has, predictably, decided not to renew the trade pact with Mexico and Canada that he negotiated in his first term and previously hailed as “the best and most important deal ever made”.
Now, having decided that his 2020 deal is unfair to the US, he has triggered an exit clause that plunges the US-Mexico-Canada trade agreement (USMCA) into rolling annual reviews over the next decade, unless there is a unanimous agreement by the three countries to change its terms.
“The United States did not agree to renew the USMCA in its current form,” his US Trade Representative, Jamieson Greer, announced on Wednesday, which was the deadline for an agreement to extend the deal for another 16 years, saying the US was not prepared to “rubber stamp” the existing deal because there were “substantial issues”.
Greer said the US would continue to engage with Mexico and Canada, nominating US trade deficits with its two biggest trading partners as the critical issue.
The US had a trade deficit in goods with Mexico of about $US197 billion ($286 billion) last year, and a $US46.4 billion deficit with Canada, although the size of the deficits overstates the trade imbalances, given that the calculations don’t include the considerable value added to the countries’ exports that occurs within the US.
About 30 per cent of the value of Mexico’s exports to the US is estimated to be contributed within the US and about 15 per cent of Canada’s, underscoring how tightly integrated the three countries’ economies are as a consequence of the USMCA and its predecessor, the North American Free Trade Agreement, or NAFTA, which was in place for 26 years before Trump tore it up.
Trilateral trade between the countries amounts to more than $US1.6 trillion, underwritten by complex supply chains that crisscross their borders. In 2020 – when the USMCA was signed – that trade amounted to $US1 trillion. The USMCA has resulted in an explosion in North American economic activity.
Trump is obsessed with trade deficits, regarding them (erroneously) as clear evidence of unfair trade. He has a long-standing aversion to free trade deals, preferring bilateral deals, negotiated with the coercive leverage of his beloved tariffs. His administration has raised the prospect of separate bilateral deals with Mexico and Canada, which they’ve rejected.
Unless Mexico and Canada do agree to a revised deal, the USMCA will limp along, with annual reviews, until 2036, when it will expire. Negotiations over changes to the deal can, however, occur in the meantime.
That injects uncertainty into the business environment for all three economies – US industry has been near-unanimous in calling for the current agreement to be extended – which is likely to have a dampening, perhaps chilling, effect on investment and employment.
It could have a particularly significant impact on the US vehicle industry, which has the most comprehensive and complex cross-border supply chains, sourcing metals and components from both America’s neighbours, with some components crossing borders several times before a vehicle is fully built.
The raw materials for a single component – aluminium or steel – might originate in Canada or Mexico, be shipped to the US (or vice versa) for casting, cross a border again to be machined, make another crossing for assembly with other components, sent to an engine plant in the US and then be dispatched as a fully built vehicle to one of the countries. That’s how integrated and complicated the supply chains are.
While the existence of the USMCA has largely protected Mexico and Canada from the universal tariffs Trump has inflicted, or attempted to inflict, on the rest of the world (the US Supreme Court knocked out his first attempt at a universal tariff regime and may well do the same to his latest 10 per cent “baseline” tariff), Trump has imposed sectoral tariffs on Canada’s aluminium and steel (a 50 per cent tariff) and its lumber (10 per cent) and 25 per cent tariffs on some Canadian and Mexican vehicle component exports.
That’s already had an effect, not just on Mexico and Canada, but on the US industry and its competitiveness and the cost of US vehicles for American consumers. Even with the tariffs imposed on Japan and South Korea, they can ship and land their vehicles in the US at prices that undercut those made in the US.
The Trump administration, rather than regarding its trade deals with Mexico and Canada as “near-shoring” with close allies to create an economic bloc that accounts for about 30 per cent of global economic activity – with the scale and competitive and economic security advantages that confers – is obsessed with “reshoring” in pursuit of domestic investment and jobs.
The price of regarding trade as a zero-sum game and disregarding the “win-win” potential of trade integration with its allies, is higher costs for US consumers and potentially less investment in the US because the tariffs and other trade barriers make US goods more expensive and less competitive in global markets.
Under the changes to the NAFTA agreement (more of an update than the wholesale replacement that Trump portrayed it as), 75 per cent of the value of a car or light truck sold in the US has to be made in North America (ie, in the US, Canada and Mexico) to be duty-free.
Under the changes the US now wants to the agreement, 82 per cent would have to be made in North America to qualify and there would have to be a minimum 50 per cent US contribution, with similar US content rules for other goods.
If it were economically sensible for US car makers to add more value within the US, they’d already be doing it – the changes the administration is seeking would force them to restructure their supply chains and add to their costs.
That wouldn’t be straightforward, given that they’d have to replicate the plants they have in Mexico and Canada and develop domestic sources, if there are sufficient sources, for the Canadian and Mexican aluminium and steel required. It could take years, even decades, for US industries to build the new supply chains.
The US has been pursuing a “divide and conquer” strategy in its attempt to force a renegotiation of USMCA, with several rounds of negotiations with Mexico, but very limited contact with Canada.
Of America’s major trading partners, only Canada and China have retaliated when Trump has imposed tariffs on their exports. Trump is also angry that Canada has been furiously pursuing trade deals with other countries and has allowed China to export a limited volume of cars to its market. Provincial boycotts of US whiskey and the broadcasting of former president Ronald Reagan’s championing of free trade also infuriated Trump.
It could take years, even decades, for US industries to build the new supply chains.
Both Canada and Mexico have indicated they are willing to discuss changes to the USMCA, but both also have their own demands, including the removal of the Trump tariffs on their exports to the US and the removal of the US value-add from calculations of North American content.
They are prepared to talk about regional supply chain security, standards for digital trade, co-operation on critical minerals sourcing and processing, customs arrangements at the border and measures to close America’s back doors to trans-shipments of goods from other countries, notably China.
If no agreement to renew and extend the USMCA can be reached, however, they will have no choice but to retaliate if new US trade barriers are erected and to invite other sources of investment and industrial activity into their economies, most obviously Chinese investment and activity.
That would fragment the world’s largest market – more than half a billion consumers are covered by the USMCA – and the world’s most deeply integrated and self-sufficient supply chains while gifting China beachheads and deeper economic and political relationships with the countries on America’s borders.
All three of the USMCA partners would lose if Trump were to gain what he seeks.
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