We all know that President Trump has been “America First” since day one. So much so, that he has focused NAFTA negotiations towards killing the “worst trade deal ever”. We know for a fact his agenda is focused on preserving American manufacturing jobs… but is killing NAFTA going to backfire?
Wilbur Ross Influences the Latest Negotiations
The day before the last negotiation, Commerce Secretary Wilbur Ross wrote in The Washington Post about a $70 billion trade deficit between the U.S., Mexico, and Canada. (A trade deficit is the gap between the goods and services America exports to its trading partners and those it imports from them) He wrote about how this trade deficit was costing America jobs now more than ever before.
How you may ask? Ross was claiming that the percentage of U.S. content in manufactured goods coming to America from Mexico and Canada have fallen between 1995 and 2011. What was even worse, in his view, was that these non-American goods weren’t even made in Mexico and Canada. This meant that, in his veiw, NAFTA is bleeding jobs not only from America, but from North America. So from this point of view, the entire purpose of the NAFTA agreement is defeated.
What many did not realize is that there are HUGE holes in Ross’ zero-sum analysis. Which is what costs us big time during the negotiation that happened the day to follow.
Holes in Wilbur Ross View of the Current state of NAFTA
Another problem with Ross’ argument is the negative light he sheds on the annual percentage drop in American-made parts in NAFTA imports. What he fails to mention is the rise in absolute terms. This means that, although we may see a decrease in American-made parts, we still see an increase in trade thanks to the agreement. Which means, ultimately, there is an increase in American-made parts being exported.
In layman’s terms, American imports from Mexico have increased from $40 billion to about $300 billion a year. So even if the percentage of American parts in these Mexican goods has decreased, in absolute terms it has increased from $10 billion to $46 billion. The same can be said for Canadian goods.
Flawed Analysis lead to Flawed Remedies
To keep jobs in America, Ross suggests tightening NAFTA’s already tight “rules of origin” requirements on imports. Currently, the treaty says that 62 percent of the parts in imports must come from North America. This is to avoid a 2.5 percent border tax that non-NAFTA countries must pay. The administration wants to raise that from 62 to 85 percent. In addition to the 73 percent rise, they want 50 percent of the content to be not just North American but strictly from the United States.
This is a nearsighted demand that will backfire.
Impact on American Jobs
You may be asking yourself through all this economic jargon, how this could possibly negatively impact the American workforce. Well, allow me to explain…
Rules of origin are not ideal if we want to maximize economic efficiency. Rules of origin force companies to source their parts from counties in which they can get the lowest tariffs, instead of from where they get the best prices. The rules of NAFTA offered an additional incentive to stay within their region. Ultimately, NAFTA encouraged the Big Three automakers to expand their U.S. operations as well as encouraged Asian auto “transplants” to set up shop in America.
Negative Impact of Possible New Rules
Tougher rules-of-origin requirements would prompt many companies to pay the extra tariff in exchange for more sourcing flexibility. The Toyotas and Hondas of the world would have little reason to stay in the United States. This is because they already have cross-border supply chains with other Asian countries.
New rules-of-origin will promt Mexico and Canada to respond in a way that will please their own domestic protectionists. That means American companies — and American workers — would lose out as work in Canada and Mexico dries up.
From Trump’s own standpoint of keeping jobs in America, tougher rules-of-origin would be totally counterproductive.