[SCMP Column] NAFTA revisited

September 03, 2018

Does anyone remember Ross Perot, the Texan billionaire who, while running for President on an independent ticket in 1992, predicted “a giant sucking sound of jobs going south” if the North American Free Trade Agreement (Nafta) came into force?

Two years later, Nafta was signed, radically reducing tariffs between the US, Mexico and Canada. Ross Perot did not become US President. And 26 years later, who heard the sucking sound? Best academic estimates suggest a net 120,000 manufacturing jobs were lost to the US economy – about 0.1 per cent of US jobs. But Nafta trade amounts to US$1.2tr, and accounts for an estimated 14m US jobs.

In a 2015 report, the US Congressional Research Service summarized multiple studies on Nafta: "In reality, NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters. The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest.”

Brad DeLong, economics professor at Berkeley was more specific in a 2017 paper: “The North American auto industry reacted to NAFTA by rationalizing itself — moving those parts of it that could be effectively performed by relatively low-skill workers to Mexico, and thus gaining a cost advantage vis-à-vis European and Japanese producers.

 “In the context of all the forces and disruptions affecting the US economy and the US distribution of income and wealth over the past half-century, NAFTA was and is simply not a very big deal

But Donald Trump, no doubt with fact-checkers at a safe distance, would have it otherwise. Nafta, he says, was “a rip off”, “the worst trade deal maybe ever signed anywhere... Deals like Nafta have left millions of our workers with nothing but poverty and heartache.”

Good crowd-stirring stump rhetoric. Good tweets. Good electoral fodder ahead of critical Mid-term elections in November. Short on fact.

Which brings us to the past week’s flurry over Trump’s long-promised plan either to annul Nafta, or renegotiate it on terms more favourable to the US.

After months of glacial – and politically embarrassing – progress, Trump revealed that a bilateral agreement had been reached with Mexico’s President Enrique Pena Nieto to update the terms of the Nafta deal – “a big day for trade, a big day for our country”.

Trump’s main negotiator, Robert Lighthizer, said Canada was welcome to sign up to the deal, and set a deadline of last Friday for completion.

Why Friday? Because if a new Nafta deal is to be agreed before Mexico’s President steps down on November 30, and Congress is to be given the necessary 90 days notice of intention to enter into a new trade agreement, then the guillotine fell at the end of August. In reality, the “drop-dead” deadline for Congress is September 30, when they insist on seeing the full text of the agreement.

There then followed a frenzy of round-the-clock negotiation with Canada, which missed the deadline, and will resume on Wednesday. The apparent goodwill of the negotiations was in no way helped by leaked comments from Trump insisting that any Canada deal would be “totally on our terms.... If I say no, the answer is no.” Angry at the leak, Trump did not deny them: “At least Canada knows where I stand,” he commented.

One gets a hint here about the kind of bilaterally negotiated world that Trump’s administration seeks to substitute for the current WTO-based multilateral trading system.

In truth, I have always felt uncomfortable with the Nafta deal. You could see benefits in Canada, the US and Mexico dropping trade barriers and integrating their huge markets. It provided natural balance versus the European Union.

But from a WTO point of view, Nafta could be seen as highly protectionist. Canada, the US and Mexico may have lowered their internal barriers, but they at the same time erected barriers to everyone else – in particular in the auto industry, which was always the heart of the Nafta deal.

And Nafta was a nightmare tangle of country-of-origin and local content rules. The deal insisted that 62.5 percent of the value of a car be made from regional content in order to be sold in America tariff-free. I recall mind-numbing hours of arguments over how you calculated this from literally thousands of auto parts going into each car. Canada was required to sell 74 per cent (not 75 per cent) of its oil to the US, and 52 per cent of its gas. There was very little free trade sentiment embedded in such discussions.

But Nafta was agreed, and over the past 24 years we have seen trade across North America explode, with very little evidence to substantiate Trump’s apocalyptic claims of “poverty and heartache”. After 24 years, there is clearly a case for updating and renegotiating out-dated practices. That is no doubt what negotiators have been aiming for, whatever the emotive rhetoric from the White House.

Trump’s attempt to use the Congressional 90-day rule as a deadline to pressure Canada into hasty conclusion has clearly failed. The deadline was always his own, and Canadian negotiators quickly saw through that. But where how?

Congress must approve the deal, but as yet has no details. Politicians and business leaders are at present unified in skepticism. Typical is Tom Donahue, head of the US Chamber of Commerce: “Nafta’s many strengths rest on the fact that it ties together three economically vibrant nations, drawing upon each of our strengths to boost the competitiveness of the whole. If you break off one member of this agreement, you break it all, and that would be bad news for US businesses, for American jobs, and for economic growth.”

As Crystia Freeland, Canada’s Foreign Affairs Minister, noted over the weekend: “For Canada, the focus is on getting a good deal. Once we have a good deal for Canada, we’ll be done.”

That means, whatever Trump says, that remaining differences on dairy and poulty trade still need to be settled, as does Canada’s “red line” refusal to dismantle Nafta’s independent dispute settlement process.

Justin Trudeau might well say: “If I say no, the answer’s no... At least the US knows where we stand.”
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

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