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LETTER PERFECT

Donald Trump’s new NAFTA is the blueprint for his trade war with China

AP/Evan Vucci
Pointing the finger at China.
By Tim Fernholz

Senior reporter

Published Last updated on This article is more than 2 years old.

The revised free trade agreement between the United States, Canada and Mexico, christened USMCA, has big implications for Donald Trump’s trade war with China. Both the US and China have leveled taxes on billions of dollars of each other’s imports as they jockey for economic power.

Now that Trump has found his way to agree with one set of allies, some hope he will move forward to unify a trade bloc against China through the Trans-Pacific Partnership, a global deal that includes both Canada and Mexico.

“The USMCA looks to be the trade pact formerly known as NAFTA plus 10-20%,” tweeted Richard Haass, president of the Council on Foreign Relations. “Hope it becomes a precedent for TPP. I suggest the US-Pacific Trade Agreement (USPTA). What matters is that the US joins it; doing so would bolster our strategic position vis-a-vis China and our economy.”

In former president Barack Obama’s push for the Trans-Pacific Partnership, a free trade agreement that also includes Chile, Japan, Vietnam, Malaysia and other Pacific rim nations, he framed the deal as an update to NAFTA that would counter China’s growing economic influence. But Trump’s approach to China isn’t coalition-building; it’s badgering China into seeking new terms.

“The TPP was the carrot approach—create a new trade zone with rules that favor the United States and the other members, and in effect induce China to join on those rules,” Edward Alden, a senior fellow at the Council on Foreign Relations, told Quartz. “Trump threw away the carrot, and now he’s using the stick.”

Regional revisions

When it comes to USMCA itself, “it seems to me that the changes are small and unlikely to have any big economic impact,” Alan Sykes, a Stanford Law professor who researches international trade, tells Quartz.

The new agreement was bolstered by concessions Mexico and Canada already made in joining the TPP-11, essentially the TPP without the US. Trump “is replicating the TPP in a package that is not so obviously tied to Barack Obama,” Berin Szoka, the president of TechFreedom, a policy think tank, told Quartz, citing provisions related to digital commerce.

The big differences are in the automotive market, where higher standards are designed to force more car parts to be made in North America rather than in cheaper labor markets, and in opening Canada’s dairy markets to US exports. Both moves are likely to raise consumer prices in the US, but they match the America First policies pushed by Trump and his trade negotiator, Robert Lighthizer.

“The original TPP…was fairly location-neutral in terms of investment, the idea was to let companies invest in whichever of the TPP countries made the most sense for them,” Alden says. “The new NAFTA tries to tilt [investment] in the favor of the United States; whether it will work remains to be seen.”

“We believe this deal has stronger labor provisions than TPP,” an anonymous White House official told reporters. “We believe it has stronger [intellectual property] provisions than TPP. We believe it has stronger environmental provisions than TPP.”

The Alliance of Automakers and the AFL-CIO both told Quartz it was too soon to tell if the deal was an improvement from TPP or the status quo. Much of a trade pact’s import rests on how enforceable—and enforced—it is, but Alden says Democrats have to face that at least on rhetoric, “Trump has done more to address their concerns about NAFTA than any of their own presidents did.”

Another difference between TPP and USMCA is a win for pharmaceutical companies. Makers of biologic drugs will have ten years of exclusive rights to the data submitted to health regulators to certify them as safe, effectively barring generic alternatives from the market. Under TPP, that timeline was five to eight years, matching current US law.

“Here it’s going to be a flat ten, which is a great thing for our pharmaceutical innovators,” the anonymous White House official said. In this case, shareholders in pharmaceutical companies will benefit, but Americans, Canadians and Mexicans are likely to face higher prices at the drug counter.

Global decisions

Despite the focus on America’s closest trade partners, China looms over USMCA. The new deal includes a provision widely seen as barring any of the members from seeking a separate free trade deal with China, and another provision targeting currency manipulation. It even includes a ban on the practice of shark-finning, that could be seen as a shot across Beijing’s bow.

“Anything under NAFTA pales in comparison to what’s at stake with China,” Alden says. “The tariff threat had an effect on Mexico’s and Canada’s negotiating positions. We’ll see whether [Trump] can do the same with China.”

Trump described his tariffs as key negotiating tools in his press conference on the new trade deal. His goals would be to win concessions as much on China’s non-tariff barriers, like strict rules limiting foreign investment and the frequent theft of intellectual property, as they would to gain market access. China made up 16.4% of all US trade by value in 2017, versus 15% for Canada and 14.3% for Mexico, but most of that was US imports.

“China is selling us five times as much stuff as we’re selling them,” says University of Southern California professor Greg Autry, who co-wrote the book “Death by China” with Peter Navarro, a White House adviser on China policy. “They need our market a lot more than we need theirs. Our main goal is convincing the public that they shouldn’t totally be fixated on short-term consumer prices, which is what the press likes to write about, and be more concerned about their economic interest and the viability of our country.”

The next test is likely be a mooted free trade deal with Japan. “The President is not going to join the TPP,” trade negotiator Lighthizer told reporters last week. “But…if you look at the five countries who are in the TPP with whom we do not have an FTA, by far the biggest is Japan.”

But with other markets in Asia and Africa ramping up, it’s not clear how long US market access will be an unrefuseable offer. In the last fifteen years, the US share of the global car and truck market has fallen by half. That reality drove the Obama administration’s consensus-building approach versus Trump’s “America First” policies.

“If your goal is to rebuild a stronger domestic consensus in favor of trade, to have Americans supporting their government on trade, than Trump’s approach was almost certainly better,” Alden says. “If your goal was to build strong relations with allies, and particularly the allies the US is going to need as competition with China intensifies, this probably wasn’t a good strategy. The US has broken a lot of crockery here, and left a lot of bad feelings in Canada, in Mexico, South Korea, we’ll see about Europe.”

Autry is more optimistic. “We’ve been able to work with our allies,” he says. “Whether the characters love each or or not, they understand the economic interests at stake.”

Additional reporting by Heather Timmons