Trump’s Mexico Deal Reveals Another Deficit
(Bloomberg Opinion) -- It never fails to amaze how little President Donald Trump, that lifelong businessman, understands about business. The most recent example took place in the Oval Office late Monday morning after his televised phone call with Mexican President Enrique Pena Nieto. The two men were congratulating each other for reaching an agreement on a trade deal that is meant to eventually replace the North American Free Trade Agreement.
Canada, of course, is also part of Nafta, but while Pena Nieto stressed the importance of getting Canada on board, Trump seemed indifferent. "We'll see if Canada can be part of the deal," he said. If it negotiates "fairly," Trump added, his team would open negotiations immediately, hoping to complete a deal by Friday. (Friday?) And if not? Well, then, the U.S. and Mexico would have a bilateral deal, and Canada would be punished.
"I think the easiest thing is to tariff their cars," said the president of the United States.
Tariff their cars? Do you know which cars are made in Canada? The Chevy Impala, for one. Also the Dodge Charger, the Ford Edge and 11 other American-brand automobiles. Thus if Trump were to impose a tariff on "Canadian cars," he would actually be hurting Ford, General Motors and Chrysler and the autoworkers he claims to be trying to help.
Writ large, this is the essential problem with renegotiating Nafta. Yes, it could use some updating, since the accord is a quarter-century old. But its core elements have become so enmeshed in the economies of the three countries — and so beneficial to them — that any radical change won't make things better. Instead, it will almost surely make things worse.
Nafta's fundamental purpose was to reduce or eliminate tariffs between Canada, Mexico and the U.S., with the exception of some politically sensitive carve-outs like Canadian dairy and poultry. One result was that the three economies became deeply integrated, as companies created new supply chains that crossed borders. If you go to south Texas, for instance, you'll see companies with factories on both sides of the border, as parts and supplies move back and forth between them.
Another thing it did was create unheard-of prosperity in Mexico — and as people got decent jobs they lost their incentive to immigrate to the U.S., something you might think would make Trump happy. Indeed, in recent years more Mexicans have returned home from the U.S. than have immigrated to the U.S.
Third, NAFTA has spurred an economic boom in the region. Canada and Mexico have seen their gross domestic product triple. U.S. trade with Canada and Mexico has more than doubled. Mexico has become the largest exporter and importer in Latin America. (It did $616 billion worth of trade with the U.S. last year)
Without question, some U.S. workers lost their jobs as a result of Nafta, especially in the auto industry, as American automakers moved much of their sedan production to Mexico. (Most SUV and truck manufacturing remains in the U.S.) But all this additional economic activity created many more jobs than were lost. And the interconnectedness of the three economies means that if you mess with Nafta, you risk costing jobs, not creating them.
As I write this, few solid details of the U.S.-Mexico agreement have emerged. It appears that a certain percentage of vehicles must be built in factories that pay workers at least $16 an hour — double the current rate in Mexico. But what that percentage is, and whether it will meaningfully change anything, is unclear.
One of Trump's demands was that the new Nafta include a five-year sunset provision, but that's either been eliminated or so watered down as to be meaningless. The percentage of North American content in an auto to get duty-free status has been raised from 62.5 percent to 75 percent. But again, there are rumblings that the way that content is counted has been changed, so it is hard to know the significance of that modification.
Reading between the lines, I get the sense Mexico's negotiators took a page from any number of smart people who have dealt with the president: If you're willing to allow him to declare victory, you don’t have to give up much, if anything. He doesn't really know the difference.
Maybe six or eight months ago, Canada would have been willing to use the same tactic. But Trump's incessant bullying of Canada — on full display Monday — has made it politically necessary for Prime Minister Justin Trudeau to be seen standing up to the U.S. president. In addition, the U.S. seems to be acting as though it expects Canada to agree to everything Mexico just negotiated — and to end its politically sensitive tariff exemptions as well. That's just not going to happen — not by Friday and not a month from now. Of course if it's not done by the end of the week, a whole other can of worms emerges. It means the deal can't be signed before Dec. 1, when Mexico's president-elect Andres Manuel Lopez Obrador takes office. And who knows what he's going to want?
In the time Trump's been president, the stock market has done well and so has the economy. But if there is one thing that could be a drag on growth, it would be unraveling Nafta and slapping tariffs on "Canadian cars" and other goods that once crossed the border duty-free.
Virtually everyone in business understands this. Too bad the president doesn't.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”
©2018 Bloomberg L.P.