President Donald Trump has scored a victory reaching an agreement with Mexico and Canada replacing the NAFTA treaty established in 1994.
Since the 2016 presidential campaign, he has criticized NAFTA as an unfair trade deal that led to outsourcing of manufacturing and the loss of American jobs.
The new U.S.-Mexico-Canada Agreement aspires to improve the terms of NAFTA by increasing the required percentage of auto and truck components produced in North America to 75 percent; requiring at least 30 percent of auto workers be paid a minimum wage of $16 an hour; opening Canadian dairy markets to American farmers; improving labor and environmental regulations; updating intellectual property protections; and maintaining current tariffs on imported steel and aluminum. According to Trump, these changes will “send cash and jobs pouring into the United States.”
These changes offer potential improvements to NAFTA and have been applauded by business, farmers and even some Democrats. But, unfortunately, the minor modifications of this new deal combined with structural changes in the U.S. economy since NAFTA was implemented suggest that Trump’s rhetoric of “high-quality U.S. jobs” and “a new dawn for the American auto industry” is bombastic.
What this new deal will not accomplish is the return of manufacturing jobs to the U.S. Many jobs that moved to Mexico are no longer well-matched to more capital-intensive production, which uses a higher-skilled American workforce. Manufacturing in Mexico is generally more labor-intensive compared with the U.S., where companies have reduced costs by substituting robots for workers.
On a positive note, what this deal achieves is the reduction of uncertainty for companies heavily dependent on North American supply chains and markets. Trump’s trade rhetoric has terrified these companies. Hopefully this deal reduces their reluctance in making new investments that facilitate productivity and economic growth.
This deal also makes it more difficult to assemble a car in Mexico and export it to the U.S. With differences in labor costs among the three partners and constraints on buying cheaper parts from European and Asian suppliers, it’s estimated that the price of vehicles will increase by $470 to $2,200.
Because the deal incentivizes vehicle production in the U.S. and at the same time raises costs (new regulations and higher input prices), it’s difficult to discern whether the benefits will outweigh the costs. Regardless, most economists see either the winnings or losses of the deal to be diminutive.
So, in Trump’s world, even a trade deal with reduced tariffs will raise the price consumers must pay. Turning to the trade war with China, tariffs are used as an economic weapon, which should evoke the public’s outcry about paying higher prices. We have heard some discontent from companies that tariffs will increase their costs and reduce profits, but little concern is expressed about the interests of consumers.
Well, Walmart shoppers, the days of “Always Low Prices” and “Save Money, Live Better” may be over.
Are taxpayers willing to subsidize Midwest farmers because of Trump’s trade war? China has retaliated with billions of dollars of tariffs on U.S. exports targeting agricultural goods, causing massive losses to farmers. Responding to his base, Trump announced subsidies to Midwest farmers, hoping to avoid backlash from a key constituency.
Trump’s tariffs on China led to Chinese retaliation on farm exports while his subsidies apply a band-aid of relief for which farmers are supposed to be grateful. Why do taxpayers have to foot the bill to protect farmers from Trump’s trade policies?
Finally, do Americans recognize that Trump is exceeding the National Security Clause of the Trade Expansion Act of 1962? Perhaps a national defense argument can be made related to steel and aluminum tariffs, but is our security compromised by imports of shampoo, dog leashes, Trek bicycles, Goody hair ties and canned tuna? Many commodities will be more expensive for U.S. citizens as Trump levies new tariffs on China.
A revised NAFTA trade deal is much better than a trade war, but it’s too soon to feel consoled. In future negotiations, Trump should focus on the best interests of the U.S. economy overall rather than what he believes is politically popular.
Cydney Emery and Isaac Pitcher are seniors majoring in economics at Westminster College. James “Cid” Seidelman is distinguished service professor of economics and former provost of Westminster College.