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Published on 2018-08-21

Evidence that the Trump administration has finally recognized a major potential loophole in its NAFTA rewrite plans.

By Alan Tonelson

August 17, 2018

It’s still unconfirmed, but if true, a development reported in the (usually reliable) newsletter Inside U.S. Trade would reveal that the Trump administration is finally recognizing a major weakness in its approach to revising the North American Free Trade Agreement (NAFTA). And special bonus – the proposal in question would also go far toward solving the trade problems with China and most of the rest of the world that have been rightly identified by the administration.

Here’s a good summary of the scoop provided Tuesday by Politico:

“Three sources close to the [NAFTA] talks said the U.S. has demanded that Mexico, and possibly Canada, accept a higher tariff rate for autos that don’t meet the pact’s new content rules. That would essentially force companies that build cars in Mexico to agree to have exports to the U.S. that don’t conform to the rule be subject to a tariff beyond the 2.5 percent rate Washington bound itself to at the World Trade Organization. USTR [the Office of the U.S. Trade Representative] also declined to confirm this development….”

The key here is the point about higher tariffs. The three NAFTA signatories have now come to agree that the treaty’s regional content rules need to be made more strict. So far, in order to qualify for tariff-free treatment anywhere inside North America, autos and light trucks (which comprise an outsized share of intra-North American trade, and have attracted the most attention in the talks) need to be made of 62.5 percent North American parts and components. The aim, at least ostensibly, has been to encourage producers outside North America to relocate production and jobs inside the free trade zone.

The Trump administration has been pressing to raise the content levels needed for such tariff-free treatment to at least 70 percent for passenger vehicles, andreportedly Mexico is now on board in principle (though the exact number has yet to be agreed on). But so far, the administration has not demonstrated much, if any, awareness that higher mandated local content levels alone won’t bring many new factories or jobs to the signatory countries – and have under-performed on this front so far – for a very simple reason. As I’ve noted repeatedly, the penalty that non-North American producers need to pay for non-compliance is only 2.5 percent – an extra cost they can easily absorb.

The Inside U.S. Trade item suggests that this point has been taken, which would be great news for all three NAFTA countries if the eternal tariff is raised high enough to foster North American production and discourage imports. Even better, this proposal – which would essentially turn North America into a genuine trade bloc if extended to all traded goods and services – would by definition limit American imports from all the countries long regarded in Washington as troublesome trade partners (like China, Germany, and Japan). For they would all find it much more difficult to supply the United States – along with Canada and Mexico – with exports, and would face great pressure to serve North American customers instead with products overwhelmingly made in the free trade zone by North American workers.

It’s true that an increase in the external NAFTA tariff would violate WTO rules and would therefore expose all three North American economies to retaliation from outside the continent. But all three countries have run chronic trade deficits with the rest of the world, so they stand to come out ahead if a full-fledged trade conflict actually resulted. And as former President Ronald Reagan emphasized when he originally broached the subject (back in 1979), North America is self-sufficient, or could easily become so, in every significant product or service used by a prosperous economy.

Indeed, Reagan subsequently and explicitly contended that NAFTA was needed as a trade bloc to fend off the challenges posed by regional consolidation in Europe and East Asia. (The Wall Street Journal article in which this argument was made is now behind a pay wall, but the quote is found in my Marketwatch.com op-ed linked above.)  So did former President Bill Clinton. Both were known – and rightly so – as free trade supporters. Donald Trump, a decided free trade skeptic, should settle for no less.

ALAN TONELSON
Alan Tonelson is Founder of the blog
RealityChekwww.alantonelson.wordpress.com – which covers a wide range of domestic and international policy issues along with political and social trends.

For 18 years before leaving to launch RealityChek, Tonelson followed the impact of globalization on the U.S. economy, domestic manufacturing, and U.S. national security for the U.S. Business and Industry Council. This national business organization represents nearly 2,000 domestic American companies, most of them small and medium-sized manufacturers.

Alan Tonelson is a regular columnist with Industry Today.



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