NAFTA anxiety continues to build

The intent of everyone going into the renegotiations of the North American Free Trade Agreement (NAFTA) was to get it over quickly, at least quickly by international trade negotiation standards. Canada didn’t think there was a lot to fix, Mexico had presidential elections set for next July and the U.S. general opinion, except for President Trump and a few of his associates in the executive branch, seemed to be, the faster it’s over, the less chance there would be of screwing up a good thing.

Of course, it’s not working out that way. The parties have already announced negotiations will go on until at least sometime in the first quarter of 2018, and precious little progress seems to be happening on the toughest issues. The Hill, a Washington news source, claims behind the scenes differences are growing, not narrowing. I asked a trusted Washington source if there was a real possibility President Trump would pull the U.S. out of NAFTA. Yes, was the reply.

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On his recent Asian trip President Trump added more fuel to the fire in speeches by re-emphasizing his preference for bilateral treaties to keep the U.S. from being cheated.

At the same time the administration’s Director of the Economic Council Gary Cohn went on television to explain that their top priority is economic growth. How dismantling NAFTA would contribute to economic growth I cannot fathom.

With business organizations and most industries opposed to Trump’s thinking on NAFTA, his position is looking more and more like something out of the playbook of the United Autoworkers or U.S. Steelworkers — something that might help fewer than a million workers at the expense of the other 330 million Americans. The last time the autoworkers played hardball decades ago they started the movement of the auto industry out of Michigan to the southern U.S. and eventually into Mexico.

One of the most contentious proposals the U.S. has put forward involves upping the North American content of autos to 85 per cent, with 50 per cent U.S. content. Currently NAFTA requires 62.5 per cent North American content, with no specific country requirement. One of the reasons auto companies finish cars in Mexico is that Mexico has free trade agreements with 46 other countries, far exceeding the U.S. in this regard.

The U.S. has also proposed a five-year sunset clause on NAFTA unless everyone agrees to renew it, which is tantamount to killing the agreement. Changing the arbitration process is close behind as a deal breaker.

Unfortunately, the few discussions regarding agriculture are as close to non-starters as one can get. The U.S. has proposed that Canada dismantle its dairy supply management system, which caps production to match domestic demand at prices set by the cost of production, and is protected by tariffs high enough to pretty much eliminate imports from the U.S. We’re not sure why dairy producers on both sides of the border require the most complicated and favourable government subsidy and management regimes but that seems to be the case. It would require heavily tinted rose-colored glasses to envision Canada moving very far on this subject.

Both Canada and America are trying to force significant labour changes on Mexico. The U.S. proposal looks like a union negotiation list involving rights to organize, child labour, discrimination, minimum wages, numerous health and safety rules, maximum hours, etc., etc., according to a report from Haynes and Boone, LLP, an international trade firm. Mexico agrees that it needs to reform its labour practices but let’s face it, this will be a long slog. Both Canada and the U.S. labour rates average over $35/hr. In Mexico it’s just over $6.

Not to be outdone, Canada suggested the U.S. pass a federal law negating the ability of employees in 28 U.S states to take advantage of “right-to-work” laws, meaning they cannot be forced to join a union to take a job. Missouri passed such a law this year. The U.S. trend is to less unionism, not more, with only about seven per cent of the private workforce unionized today. Government, of course, is the main source of union growth, via public employee unions.

Trade deficits are another one of President Trump’s bugaboos. I’ve commented previously on the lack of validity of deficits as a measure of trade success or failure, and I haven’t seen anything since then to change my mind. Neither have the negotiators for Canada and Mexico.

Haynes and Boone is not aware of any free trade agreement that tracks trade deficits.

What are the chances that outside forces will ultimately convince President Trump that withdrawing from NAFTA is a bad idea?

We won’t know that until a final decision is made; however, we can say that many have tried to convince him. The Hill reports multiple business organizations have called on 250 House congressional offices in an attempt to secure support for NAFTA. Canadian, American and Mexican agribusinesses, including the CEOs of major produce companies and the chair of the United Fresh Produce Association, met in Mexico City on the sidelines during that phase of the NAFTA negotiations in a united effort to emphasize the benefits of NAFTA to producers and consumers in all three countries.

If political pressure doesn’t have any effect, those who favour free trade may have to turn to the courts. America is a litigious country and the political left has already filed several lawsuits to halt or lighten the impact of executive orders issued by President Trump. So the chances are very good that if he does decide to withdraw the U.S. from NAFTA, the first result will be a blizzard of suits filed by the right, left and middle of the political spectrum in the United States.