Quick Take on NAFTA 2.0

This is the sixth article in a series produced by NDN challenging Trump’s tariffs.

Last night, negotiators from the US and Canada unveiled an agreement that would include Canada in the already announced US-Mexico trade deal, thereby setting the stage for the passage of a revised NAFTA deal within a few months. Trump was quick to herald the “historic” deal but similar to the agreement with Mexico (and that with South Korea signed last week), the agreement fundamentally keeps NAFTA the same and adds in only a few cosmetic changes. The following are NDN’s three major takeaways from the deal.

The deal is largely cosmetic

The deal with Canada is exceptionally narrow, and affects only small parts of either country’s economy. The major update concerns Canada’s agreement to eliminate a subsidy program for milk products (called Class 7 milk), thus opening the Canadian dairy market to US farmers. However, milk products account for only $364 million in US-Canada trade, or 0.06% of total cross-border trade. Further, the deal gives US farmers access to 3.6% of the Canadian dairy market, compared to 3.25% given under the TPP. In total, therefore, US farmers will have access to $66 million in greater export opportunities. By comparison, from 2017 to 2018 American farmers saw a decline in income of $12.5 billion as a result of Chinese retaliation to Trump’s tariffs, or 190x the increase in export opportunities from this deal and 34x the size of the entire dairy trade between the US and Canada. Furthermore, the large varieties of other protectionist measures that both countries use to protect their dairy farmers remain in place. Indeed, the Class 7 milk program was only first implemented in spring 2017, meaning that US dairy exporters now face the same level of Canadian protection as they did when Trump took office in January 2017.

The two other major parts of the deal – a 16-yr sunset clause and the retention of the Chapter 19 dispute resolution mechanism – actually keep NAFTA more of the same. The 16-yr sunset clause (significantly longer than the 6-yr one Trump wanted) pushes another re-negotiation a long way down the road, while the Chapter 19 mechanism (which was in the 1994 NAFTA agreement) allows Canada to more successfully challenge US anti-dumping tariffs on lumber and other products. This narrowness is comparable to the small impact of the US-Mexico deal agreed to last month. The major change in that deal, a revision to rules of origin for autos, is likely to impact only 1-in-10 Mexican car exports to the US through its North American content requirement and 1-in-3 through its wage requirement. Even that likely won’t affect the structure of production because automakers can simply accept a 2.5% MFN tariff outside of NAFTA if their costs increase by more than that 2.5% amount.

The agreement is slightly pro-free trade

The deal with Canada is actually pro-free trade in nature (to the extent that it changes anything), in major contrast to Trump’s arguments that more trade destroys jobs. The Class 7 milk subsidy was a protectionist measure by Canada that reduced trade flows, so its abolition will lead to larger cross-border trade. Likewise, the US concession to keep the Chapter 17 dispute resolution mechanism makes it harder for Trump to impose tariffs on Canadian lumber and other goods in the future – another win for free trade. Finally, another US concession in the deal granted Canada 2.6 million tariff-free car exports in the event that Trump enacted a blanket tariff on car imports. Given that current Canadian car exports to the US are 1.8 million cars, this means that Canada will not be affected by a potential car tariff. This pro-trade axis contrasts slightly with the US-Mexico deal, which de facto imposed a small tariff on Mexican autos and auto parts. However, this tariff would affect only 1-in-3 Mexican autos and at maximum at a 2.5% rate, so the overall level of protectionism in the US-Mexico-Canada deal is likely a wash or negative. One thing still to be seen is the fate of Trump’s steel and aluminum tariffs on Canada and Mexico, which have not been repealed as part of this agreement.

The deal is a less ambitious version of the TPP

The deal with Canada is largely an application of clauses from the TPP (that included Canada, Mexico, and the US), a deal that Trump bitterly opposed and withdrew from in early 2017. More than two-thirds of the chapters of the new deal can be traced to the TPP, and almost all of the market access in the new deal was granted in the TPP as well. For US dairy exporters, the new NAFTA expands access to Canada’s dairy market by only 0.35% more than the TPP, while the dispute resolution mechanism and intellectual property chapters are largely carried over from the earlier trade deal. Similarly, the US-Mexico deal would at a maximum affect $10 billion in Mexican auto exports, while the TPP actually opened up market access for $90 billion in US auto exports. As a result, this deal can largely be seen as a re-application of the already negotiated TPP, but with less ambitious liberalization that does less for US exporters. While the TPP reduced tariffs on 18,000 US products and simplified regulatory barriers in dozens of industries, this deal mostly affects only the dairy and auto industries.

Overall, therefore, NAFTA 2.0 is largely the same as NAFTA 1.0 and the TPP that re-negotiated it. This stands in significant contrast to the explosive rhetoric used by Trump (i.e. threatening to tariff Canada’s auto exports at a 25% rate and calling NAFTA “the worst deal ever made”). Why then would Trump agree to it? For one, Trump himself doesn’t care about the specifics of trade deals as long as he’s able to claim them as a “win.” But secondly, Trump and his advisors must have realized that his trade policy is enacting devastating consequences on farmers and manufacturers across the country, and is widely unpopular especially in important midterm battlegrounds like Iowa and Kansas. Facing this pressure and worried about a blue wave in November, he may have been willing to cut his losses and simply embellish whatever deal he could get.