The Millennial Economy Part III: Global Value Chains and NAFTA

Stimson Spotlight

The Millennial Economy Part III: Global Value Chains and NAFTA

NAFTA is back in the news as negotiations were held in Mexico City last week. As expected, there were no major breakthroughs, and with none expected in December, it is clear governments are pushing serious talks into 2018 and possibly later as we approach the Mexican election. That kicks the can on possible termination well into the new year and avoids a short-term crisis, but it also prolongs the uncertainty about the agreement’s future. Of course, as I discussed last week, if the administration’s goal is to maximize uncertainty, deter American offshore investment, and slow down our growth, then kicking the can will do the job quite nicely.

So far, this has been an unusual negotiation in that the U.S. has persisted in some of its most controversial positions in the face of opposition from almost everybody, including the people directly affected. That does not generally happen in a democratic system. In addition, our negotiating partners, Canada and Mexico, have not behaved the way the Trump administration wants them to, leading to odd arguments over how the negotiation should be conducted rather than over the specific positions put forward. 

First, on the question of what people think, it appears that the president has done a pretty good job of convincing people his goal is to torpedo the agreement even though that is not what they want. A Politico/Morning Consult poll released late last month shows that: 

“Fifty-five percent of nearly 2,000 registered voters surveyed felt that NAFTA should be updated to strengthen ties. That number was highest among members of Trump's own party, with 60 percent of Republicans expressing support for strengthening ties, while 53 percent of Democrats and independents agreed.

“But the survey also showed voters feel Trump is trying to do just the opposite. Asked whether they believed the president wanted to strengthen the relationships between Canada, Mexico and the U.S., just over one-third — or 35 percent — said yes, while 44 percent said they believe he wants to weaken them.”

So, here we have an agreement which is actually gaining in popularity compared to last year at the very time people are concluding the president wants to weaken it. And it appears the public is on to something. A recent study by ImpactEcon, Revising NAFTA:  A Supply Chain Perspective, concluded:

“Overall, the results show that the US’s reversal of NAFTA leads to a decline in real GDP, trade and investment in the US, Canada and Mexico, with most of the losses resulting from Canada and Mexico’s reciprocation. The losses in low skilled employment are most significant, with employment declining by 256,000, 125,000, and 951,000 in the US, Canada and Mexico respectively. Production and specialization of production across the NAFTA region declines, particularly in those sectors with the highest levels of vertical specialization across NAFTA. The motor vehicles and services sectors in all three NAFTA countries decline, along with production of US meat, food, and textiles; Canadian chemicals and metals; and Mexican textiles, wearing apparel, electronics and machinery.”

On specific issues, the loudest consistently have been the farmers, who have correctly identified the extent their incomes would crater if the U.S. withdrew from NAFTA, but the latest entrant has been the auto industry, which has been objecting vociferously to the administration’s rules of origin proposal. A coalition of manufacturers, component suppliers, and dealers has formed to fight the proposal. At a Senate Finance Committee field hearing in Texas on NAFTA last week, Mitch Bainwol, president and CEO of the Alliance of Automobile Manufacturers, said, among other things:

"Taken in its entirety, this proposal is unprecedented and would have significant ramifications on our industry and the U.S. economy as a whole….No vehicle produced today could meet such an onerous standard. It is unlikely that any vehicle ever could, even if sourcing changes were made in an attempt to do so."

One of the mysteries of the negotiation is why the administration continues to press forward with proposals that everybody is against and which, according to Canada, Mexico, and the industry, they can neither explain nor defend with any data. 

Second, Ambassador Lighthizer has begun to complain Canada and Mexico are not behaving properly, meaning they are not doing what we want. Apparently, our idea was that we would make outrageous demands which would force the others to come back with counter-proposals that move in our direction, and after further back and forth would end up somewhere close to what we want. Instead, our partners have had the temerity to do what is good for them rather than us, decline to play our game, and instead demand we justify our positions, which apparently, we cannot do. Of course, sovereign nations get to do that, which is why this is different from a New York real estate negotiation. 

The remaining question is whether the president will play the spoiled five-year old and pick up his marbles and go home. He has hinted at that in the past, for example in his interview on Lou Dobbs Tonight, "I tell my people, right now it's going to be very hard, and in my opinion, in order to make a fair deal with NAFTA you have to terminate the deal and then you have to see where you're going to come, and we will come out." Tortured syntax aside, this is reminiscent of the general during the Vietnam War who announced that we had to destroy the village in order to save it. Nobody believed him then, and nobody is going to believe the president now if he repeats that mistake.  

 

Flickr: Presidencia de la República Mexicana