New NAFTA Is Just Old Protectionism and Bad Economics
A new North-American trade deal is in the works between the U.S. and Canada, after a tentative agreement was reached with Mexico last week. The deal would replace the almost 25-year-old NAFTA accord between the three countries. The media and industry alike are suffering from "deal fever," as they eagerly await the results of negotiations.
There is not much known about what this new deal will involve exactly. However, the few things we do know indicate there’s no need for any excitement. The new trade agreement will be simply an amalgamation of the old NAFTA, the previously-rejected TPP, and some new protectionist measures.
Is it likely to be a win for free trade? Not by a mile.
First, the agreement with Mexico specifies that two thirds of a car’s value (up from 62% in NAFTA) must be manufactured in North America, and almost half of it must be manufactured by workers earning a minimum of $16 per hour. Only the car manufacturers that meet these new requirements will be allowed to ship vehicles across the border at zero tariffs—others will pay a customs tax of 2.5%. This comes as great news for industrial unions in the U.S. and will be beneficial also for Canadian unions in the event of a deal. But Mexico also hopes that this will force auto makers to raise wages. However, these rules of origin and wage and content requirements only increase manufacturing costs. This may eventually reflect in higher car prices, and may bring about the relocation of auto industries from North America to lower cost jurisdictions in the long run.
Second, steel and aluminium imports are currently subject to tariffs after Trump’s latest policy attempts to rebuild U.S. metal industries. These restrictions are likely to remain in place in the form of a quota plan. The impacts of quotas and tariffs are similar, and will bring about price increases and losses for consumers and adjacent industries.
Other measures include the extension of copyright to a 75-year term past the creator’s death, and scrapping NAFTA’s Chapter 19, under which companies could sue for wrongful anti-dumping or countervailing duties. These measures increase governments’ influence in business transactions and intervention in prices, and are likely to reduce innovation in the long run. What’s ironic is that the copyright term extension existed in the Trans-Pacific Partnership that Trump refused to sign back in early 2017.
Canada has opposed these two changes, but it may however agree to them if something else is given in return. It may, for instance, negotiate to keep its very low de minimis threshold for duty-free goods of $20—compared to $800 in the U.S. and now $100 in Mexico. Or it may fight to continue protection, in some form or other, for its rich dairy farmers from Ontario and Quebec, whose great influence over Canadian politics makes them a powerful interest group.
If it looks to you like the "much more fair, really good deal" with Mexico (and possibly Canada) is merely shifting trade regulations from one area to another instead of reducing them, your eyes are not deceiving you. The reason for these shifts is to transfer the highly targeted benefits that come from protectionism from one group to another. Even these are fairly short-lived though, because when imports drop, so do exports. If consumers spend more on domestic goods, domestic prices rise, and the more they rise, the more exports are reduced.
The new trade agreement is simply about making new deals for new special interests. Free trade or consumer interests never really enter the equation. Campaign donations do.
Mises’s view of this was very blunt and practical. In Omnipotent Government, he showed that modern trade agreements bore no resemblance to the commercial treaties of Cobden and Chevalier:
“In the age of laissez faire commercial treaties were considered a means of abolishing, step by step, trade barriers and all other measures of discrimination against foreigners… Then the tide turned. The meaning of commercial treaties changed radically. Governments became eager to overreach one another in negotiations. A treaty was valued in proportion as it hindered the other nation’s export trade and seemed to encourage one’s own.
It is vain to expect anything from purely technical changes in the methods applied in international negotiations concerning foreign-trade matters.” (1944, 247-8).
If it also seems to you that the inevitable detrimental impact of the new trade agreement on domestic prices and living standards is contrary to the stated goals of other government policies, you are right again. Mises explained in Bureaucracy how the interests of powerful groups often conflict, and are dealt with in a haphazard manner by state administrations:
“The department of labor aims at higher wage rates and at lower living costs. But the same administration's department of agriculture aims at higher food prices, and the department of commerce tries to raise domestic commodity prices by tariffs. One department fights against monopoly, but other departments are eager to bring about—by tariffs, patents, and other means—the conditions required for the building of monopolistic restraint” (1944, 85)
As various trade agreements change names, clauses, and proponents, with the old bait and switch tactic, protectionism only changes its less-than-convincing disguise. “The new consumer flimflam agreement” would be a more fitting name.