Trump’s Nafta Deal Isn’t Worth the Price

(Bloomberg Opinion) -- Ever have a big argument with your spouse, and think you won it? But then later realize that the momentary satisfaction of victory pales against the good will you lost? And if your spouse is miserable, you’ll probably end up miserable too.

That’s the best analogy for what is going on right now with Nafta. The final result probably will be satisfactory, and in some ways it might even be a little better for the U.S. But the way it happened doesn’t seem worth the price.

In the abstract, the theory behind the President Donald Trump’s renegotiation of Nafta makes sense. His view is that multilateral trade agreements require the approval of too many parties, take too long to negotiate and end up watered down. So the U.S. might do better with bilateral negotiations. America might even have more bargaining power, due to its size and its resulting ability to dictate terms.

With something like that model in mind, the Trump administration set off to renegotiate Nafta. Trade was a major theme on the Trump campaign, after all, so it had to do something. And this was something.

There are reasons to believe, however, that this model does not quite apply. The Trans-Pacific Partnership, or TPP, was already in place, and that would have revised Nafta, as it includes both Canada and Mexico. Trump could simply have supported TPP, and he had the liberty and bargaining power to ask for revisions. Joining TPP also would have helped solve Trump’s China problem, by checking the economic rise of China in some parts of the Pacific region.

The problem is that TPP was not Trump’s creation – it is the product of the previous administration, and President Barack Obama vigorously promoted it during his last year in office. So it would have been hard for Trump to take credit for it.

Then there is the question of whether the U.S. is getting a better deal by negotiating first with Mexico and then with Canada. What is known about the agreement so far shows only modest changes.

To avoid tariffs, 75 percent of a car has to be made in either the U.S. or Mexico, as opposed to the previous 62.5 percent. Some 40 to 45 percent of the content has to be made by workers earning at least $16 an hour, which would cover U.S. but not Mexican workers. That would shift some production back to the U.S., but would also raise the price of cars for U.S. consumers. Rules on intellectual property protection would be enforced more strictly, which has been the global trend in any case. The pact does not resolve the ongoing tariff crisis between the U.S. and Mexico on steel and aluminum, nor is Canada at the moment included.

Further details will doubtless emerge. But forgive me if I am not overwhelmed by these improvements. Possibly the new deal will weaken the investor protection provisions in Nafta, an acceptable but not major change. U.S. energy companies may receive greater access to Mexican markets, thereby limiting the previously privileged position of the Mexican state-owned energy sector.

Overall this is probably a better deal for the U.S., economically speaking. It may improve if Canada joins, and given the legislative calendar, Trump can be expected to present Canadian officials with a take-it-or-leave-it offer. Note also that many parts of the deal are likely to bear a resemblance to TPP.

But again: At what price? Canadians and Canadian politicians now feel slighted, and it will be harder for Canada to support U.S. initiatives, especially those led by Trump, in the future. It may be a long time before Canada feels like an even vaguely equal partner again. In the meantime, the U.S. and Canada have ongoing dealings and negotiations concerning water rights, border and migration issues, intelligence sharing, terror prevention, and presenting a (relatively) united front against other foreign powers, including Russia in the Arctic. The marginal gains in trade just don’t seem worth the deterioration in the relationship.

And should Mexico really feel elevated by getting the first crack at the deal? Surely it must know that it might not be the favored party the next time around.

Nonetheless, Trump is likely to get his victory, at least if Congress proves amenable. But there was a much easier way – one that, instead of leaving America's reputation in tatters yet again, would have enhanced America’s international standing. Sadly, unsurprisingly, the president did not take it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include “The Complacent Class: The Self-Defeating Quest for the American Dream.”

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