Moneybox

Is Donald Trump About to Become NAFTA’s Savior?

TOPSHOT - US President Donald Trump listens during a phone conversation with Mexico's President Enrique Pena Nieto on trade in the Oval Office of the White House in Washington, DC on August 27, 2018. - President Donald Trump said Monday the US had reached a 'really good deal' with Mexico and talks with Canada would begin shortly on a new regional free trade pact.'It's a big day for trade. It's a really good deal for both countries,' Trump said.'Canada, we will start negotiations shortly. I'll be calling their prime minister very soon,' Trump said.US and Mexican negotiators have been working for weeks to iron out differences in order to revise the nearly 25-year old North American Free Trade Agreement, while Canada was waiting to rejoin the negotiations. (Photo by MANDEL NGAN / AFP)        (Photo credit should read MANDEL NGAN/AFP/Getty Images)
Give the administration some credit.
MANDEL NGAN/Getty Images

It could have been much worse.

For a long time, it seemed as if Donald Trump might really be serious about scrapping the North American Free Trade Agreement. Investors certainly acted that way, selling off Mexican pesos and Canadian dollars when rumors about withdrawal would swirl. Who could blame them? Trump is the most erratic and protectionist president in recent history—a man who once sat with his advisers in the Oval Office and demanded: “I want tariffs!” Maybe he would try to jettison the pact, even if it would cause havoc for entire sectors of the economy he claimed to be trying to save.

That possibility is now starting to seem pretty remote. Earlier this week, Trump announced a preliminary deal with Mexico. At the press conference, he hinted that Canada could be left out of a final pact unless it swallowed some concessions. But negotiators from both countries are working to hash out a compromise. In order to meet a loosely self-imposed deadline of Friday, the White House sent Congress a notice declaring that it planned to sign an agreement with Mexico in 90 days “and Canada, if it is willing.”* It also said it would pick up talks with Ottawa next week. Last minute drama aside, it looks as if a deal is (haphazardly) coming together. If that happens, Trump could go from being the president who threatened NAFTA’s very existence to the president who finally got Americans to stop fighting about it.

There are a few reasons why, despite the president’s bluster, it seems likely Canada and the U.S. will be able to strike a deal. The big one: There’s pressure on both sides. Losing NAFTA would be a humiliating and economically damaging turn for Canadian Prime Minister Justin Trudeau. And while Trump may be tempted to sign a bilateral deal with Mexico, it’s not clear he can push such a thing through Congress, which has to approve whatever the administration crafts. Trump notified Congress he was renegotiating NAFTA under fast-track authority, guaranteeing it a straight up or down vote.* But Republican senators like Pat Toomey of Pennsylvania are warning that an agreement that leaves out Canada wouldn’t qualify for that treatment, and so would need 60 hard-to-get votes in the Senate.

Trump might have more leverage over Congress if it was entirely clear that he could abolish NAFTA on his own. But it’s not. While Trump technically has the power to formally withdraw from the trade pact, many of its actual rules are written into U.S. law by statute, which Congress would have to change. If it didn’t alter them—and there’s no real reason to think it would—we could end up with a “zombie NAFTA” lingering on in practice, as Todd Tucker of the Roosevelt Institute has put it. Better for Trump to sign something he can call his own.

After the Mexico agreement was announced, it quickly became conventional wisdom that Trump was merely rebranding NAFTA, with a few changes around the edges. This, it turns out, was a bit unfair. The White House may not be totally altering the core of the agreement. But it has scored some substantive changes.

Take its rules for the auto industry. Under the new NAFTA, 75 percent of the value of any vehicle will have to be produced in North America for the car to quality for tariff free treatment—up from 62.5 percent currently—which likely means fewer parts imported from China. Meanwhile, 40 to 45 percent of a car or truck will need to built by workers making $16 an hour. In order to hit that requirement, automakers may need to bring back a bit of manufacturing from Mexico, where auto assembly workers make less than $8 an hour on average, while those in parts factories earn less than $3. It’s possible that some auto companies operating in Mexico will decide it’s not worth trying to meet these requirements, and simply choose to pay the 2.5 percent tariff that cars from outside North America are subjected to. But it could also create a few more jobs in Detroit or Alabama.

Mexican workers stand to gain new rights under the deal, as well. Today, the country’s labor unions tend to be controlled by employers, which helps keep pay low. The new NAFTA would require Mexico to pass legislation guaranteeing workers real collective bargaining rights. As of yet, there don’t seem to be strong mechanisms in the pact to make Mexico enforce these rules on the books. But Trump’s team has made progress on the issue that American progressives have long been seeking.

Trump’s NAFTA would also roll back the parallel legal system that currently lets foreign corporations sue governments outside of traditional courts, known as Investor-State Dispute Settlement, or ISDS. This would be another major win for left-leaning trade critics, such as Sen. Elizabeth Warren, who made ISDS a centerpiece of her opposition to the Trans Pacific Partnership, and may be the most fundamental revision to the pact. ISDS, which has become a common feature of trade pacts globally, allows businesses to challenge governments before an arbitration panel if they believe their property has been illegally seized. But many have worried about companies using it to challenge basic health and environmental regulations. Philip Morris sought damages from Uruguay when the country sought to put graphic health warnings on cigarette packages, for instance (thankfully, it lost). According to Public Citizen’s Lori Wallach, who has been briefed on the specifics of the preliminary deal, the new NAFTA would eliminate the use of ISDS between the U.S. and Canada, and severely restrict its use in Mexico. The agreement does contain a carve-out for some energy companies, which would still get to use the old system. But “ISDS as it has ever been known for all intents and purposes is gone,” Wallach told me.

These changes are not going to bring back all of the U.S. manufacturing jobs that have moved to Mexico over the years. It may not even significantly change our trade balance with our Southern neighbor, or our northern one, for that matter. It will almost certainly not do anything about America’s overall trade deficit, which is largely determined by currency values and global capital flows and has very little to do with the specifics of individual trade pacts. But unless something goes wildly wrong, Trump is on the verge of leaving his stamp on NAFTA. And while it might not be the totally new and improved trade deal he promised, simply renegotiating to the extent that he has (or, more specifically, bloviating and threatening while his trade staff do the hard work of negotiating) may be an important legacy in and of itself.

In a lot of ways, NAFTA’s political importance has largely outweighed its economic importance; as Noah Smith noted at Bloomberg, the deal may have caused some harm to manufacturing workers, but NAFTA’s damage pales in comparison to the effects of China, which by managing its currency and massively subsidizing domestic industries has had a much more significant impact on global trade. But since it was signed, NAFTA has been a lightning rod for politicians. Back in 2008, you may recall, even Hillary Clinton and Barack Obama felt compelled to promise they’d renegotiate the deal or leave it (and they probably didn’t mean it).

These days, NAFTA is generally popular among Democrats, who seem to be embracing free trade in reaction to the president. If Trump does sign his revisions and rename it, his supporters may finally come around to the deal, if only because it’s his accomplishment—and he’ll have diffused criticisms from both the right and the left. At that point, maybe we’ll finally be able to stop fighting over our trade relationship with Mexico. For Trump, it would be something of a Nixon-to-China moment. The lunatic president who threatened to destroy NAFTA may be the one who actually makes America learn to love it.

Correction, Sept. 1, 2018: This post originally misstated that the White House said it would sign the agreement with Mexico in 30 days. It’s 90 days. It also misstated that the fast-track authority was specifically for NAFTA. That authority exists independent of NAFTA.