The USMCA is more than just a rebranded NAFTA. It’s the shape of things to come.
Globalization 2.0. That will be the result of the acceptance of Donald Trump’s conversion of the 1994 NAFTA agreement he found so objectionable into a framework for a tripartite deal between the same parties-the United States, Mexico, and a reluctant Canada.
This is no mere NAFTA 2, says the president. It is a brand new U.S.-Mexico-Canada Agreement, or USMCA, which doesn’t quite pronounce trippingly on the tongue. Trump, who knows a thing or two about branding, or should, is alone in liking the way that sounds, “Like the United States Marine Corps with an A at the end.” Washington wags say MUSC would be easier on the tongue, but for Trump, US must come first.
This agreement, which does in fact retain some of the NAFTA architecture, including a modified version of its dispute-resolution mechanism, is important for three reasons. First, it signals that Trump is indeed using the threat of tariffs, especially on cars, only as a bargaining tactic to gain concessions he believes to be in America’s interest, rather than as a prelude to a permanent regime of trade-stifling tariffs. Second, we have reached the end of an era in which those who suffer from the post-WWII trading order are to be the unheard collateral damage of that order. And third, USMCA is the blueprint for what the world’s trading relations with America will look like by the time Trump leaves office.
The significance of the new arrangement cannot be overestimated. Trump’s hostile takeover of the Republican party has neutered the historic free-trading bloc that until now has dictated the GOP’s policy. Its corporate supporters and conservatives have always believed that free trade maximizes the efficiency with which the world’s resources are used, and increases the world’s rate of economic growth. They believed that by having each trading partner and its work force specialize in what it does best, a supply chain will develop and snake around the globe, providing consumers with goods at the lowest possible cost and highest possible quality. Efficiency yes; fairness not so much.
These traditional free-trade advocates are partly correct. Such a trading system, especially when linking market economies, has produced unparalleled material well-being. But not all economies rely on markets to allocate resources. Some-China being the leading example-look more to Karl Marx-Vladimir Lenin than to Adam Smith-Milton Friedman, and aim to use state intervention to make their countries great again at the expense of the United States. Then, too, free traders have long paid little attention to what economists call the distributive consequences of the trading system they idolize.
Yes, free trade has produced multi-million-dollar incomes for international deal-makers. Yes, it has flooded the shelves of Walmart and other retailers with inexpensive gadgets and apparel, giving American consumers a cornucopia of affordable products from which to choose. But it also has contributed to the flight of millions of jobs from America-two million lost to China alone according to studies by academic economists David Autor, David Dorn, and Gordon Hanson-in the process contributing to wage stagnation and the hollowing out of many communities.
The new tripartite arrangement surrenders free-trade purity for advantages for American workers. It shifts more of the work producing and assembling vehicles from low-wage Mexico to high-wage-and higher-cost-America. Car companies are required to ensure that 40 percent to 45 percent of the vehicle is made by workers earning at least $16 per hour. And that at least 75 percent of a car’s value be produced in North America, up from 62.5 percent, making it more difficult for Mexico to incorporate parts made in China, and then ship the vehicle virtually duty-free into the United States. There are other details, including greater protection for patents and intellectual property-some are still being worked out, but the general direction is clear: more attention to the needs of American workers and manufacturers, without wholesale destruction of major supply chains.
An organization representing North American-based manufacturers calls the deal “an encouraging development.” Geoffrey Gertz, a fellow at the Brookings Institution, a liberal-leaning think tank, says it “squeezes a few more dimes out of Canada and Mexico” at the expense of undermining America’s influence in the world. Perhaps. But much of that influence was gained by signing deals that overwhelmingly favor America’s partners. As they say in Washington, there is a new sheriff in town, and forfeiting influence gained by excessive deference to the interests of other nations troubles him not.
Oh yes, a reluctant Justin Trudeau, Canada’s prime minister and a pet peeve of Trump’s, was forced to relax barriers to the importation of American poultry, eggs, and dairy products. (We agreed to take more Canadian peanuts.) As Adam Smith noted, the use or threat of high tariffs is “good policy when there is the probability that they will procure the repeal of the high duties” imposed by a nation’s trading partners.
Trump says the United States will “reclaim a supply chain that has been offshored to the world.” He now plans to turn his attention to auto imports from the European Union and Japan. And to China, as soon as his good friend Xi Jinping can no longer tolerate the trade war’s damage to his economy and sues for peace.
There you have it: Globalization 2.0. A trading system more attentive to the interests of American workers and, if the stock market is to be believed, its investors, rather than solely to those of its consumers. The price to be paid is a reduction in efficiency, greater reliance on government intervention and regulations, and a consequent increase in costs and prices. The gain is a system that just might be seen as fairer-and therefore prove more sustainable, and more resistant to a protectionist backlash far more disruptive than anything Trump can conjure.