KEEP CALM AND NEGOTIATE

The new NAFTA didn’t avert a crisis. It just delayed it.

Not business as usual.
Not business as usual.
Image: Reuters/Rebecca Cook
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The North American Free Trade Agreement, signed in 1993, was state-of-the-art for its time. The new version of NAFTA, not so much, experts say.

Some have joked that the changes are so negligible that the pact doesn’t deserve its unwieldy new name: US-Mexico-Canada Agreement, or USMCA. The protectionist measures that Donald Trump was able to tack on, they point out, don’t amount to much in practice.

In principle, though, the new deal represents a pretty groundbreaking shift from free trade to managed trade.

It’s unclear whether USMCA, like it predecessor, will end up shaping the deals that follow it. Even if it doesn’t, free traders may find that the symbolic concessions they gave Trump to keep trade flowing as usual will prove to be a real cost in the future.

NAFTA: A precedent-setting agreement

The original NAFTA was signed at a time when the US and other countries were betting on openness. The Cold War had ended a few years before. The US was leading a global push to bolster international rules. (One year after the US rolled out NAFTA, it helped launch the World Trade Organization.)

Back then US leaders saw free trade not only as way to give American companies more business, but also as a political tool to address pesky problems, like illegal immigration. They thought making Mexico a trading partner would improve its economy and make it a more stable, safer neighbor.

That kind of win-win mentality led to NAFTA—the first major trade agreement between poor and rich countries. The new arrangement came with other innovations. To address anxieties about the huge difference in wages, NAFTA drafters included side deals to protect labor and the environment, another first.

“It started to become clear that free trade had implications that went beyond trade,” said Chris Wilson, deputy director of the Wilson Center’s Mexico Institute. “So we finally decided that we had to regulate those things in the context of free trade and of trade agreements.”

That became the standard for other US deals, including with Peru, Colombia, and the current-state-of-the art agreement, the Trans-Pacific Partnership, or TPP.

The new NAFTA: USMCA

More than two decades after the creation of NAFTA, it’s clear that labor provisions did not get rid of anxieties with trade. As a candidate, Trump fueled those fears by blaming “bad trade deals” for eroding the quality of life of blue-collar workers. To bring back prosperity, he told them, all he needed to do was take charge of the offensive terms to ensure they benefitted the US.

What that meant, in practice, would be restricting imports into the US, forcing producers to make their wares locally. Many voters bought his argument—even as economists and the executives of the companies he was trying to save said his strategy wouldn’t work.

USMCA, announced Sunday, is the first major agreement that codifies a move towards more managed trade, says Wilson. It spells out how much North American content a product must have, in order to travel across the three countries duty-free; to keep jobs in the US, Trump insisted on raising the North American content in cars—to 75% from 62.5% under NAFTA. He was also able to extract an unprecedented concession: that 40% of a car’s content be made by workers earning at least $16 an hour. (Experts say that many cars traded under NAFTA already meet both requirements.)

Trump’s managed trade approach doesn’t permeate the whole deal. In parts, USMCA bears close resemblance to the TPP, which Trump scrapped at the beginning of his presidency because it was “unfair.”

But he did succeed in changing the focus of US trade policy, though. Instead of supporting free markets, as the US has traditionally done, the new NAFTA shows that the US now favors tailoring policy to support particular industries and firms, says Emily Blanchard, an associate professor at Dartmouth College’s Tuck School of Business.

That puts the US closer to the practices of its biggest trading rival—China—and further in spirit from the markets-based international trading system it helped build. It’s an approach Trump has already said he will try with other trading partners.

Built-in instability

Another USMCA provision that observers are putting in the “it looks worse than it actually is” category is the sunset clause. Under it, USMCA will die after 16 years unless all three members agree to save it. It’s a much better alternative than the five-year clause Trump initially proposed, experts say. It’s equivalent to four US administrations, and long enough to give investors certainty to make trade-related business decisions, they note.

Nevertheless, it walks back the original commitment that Canada, Mexico, and the US made, and makes it easier for members to flake out. Two professors, Gustavo Flores-Macías and Mariano Sánchez-Talanquer, call it “the deinstitutionalization of North American economic ties” in a New York Times op-ed.

The dependability of this partnership is undermined every time the agreement is up for renegotiation, whether scheduled or not. That’s what we mean by deinstitutionalization: If it is subject to political whims in the three countries, then it is no longer a settled agreement, and its place as a foundation of cooperative United States-Mexican relations will quickly erode.

For the US, that could mean a less stable neighbor to the south, and one that’s less reliably helpful to the north.

A Trumpian precedent?

For now, the biggest USMCA takeaway for outside observers seems be how to negotiate with the president without blowing up trade relations.

Given Trump’s initial demands, the deal’s final draft—it still needs to be approved by lawmakers in the US, Canada, and Mexico—is not as damaging to free trade as feared. For now, it allows the three countries to largely carry on as they have at a relatively low cost.

“The bullying tactics that the Trump administration is using kind of work,” says Patrick Leblond, from the Centre for International Governance Innovation, a Canadian think tank. “On the other hand, what is also interesting is that pushing back actually works.”

That realization, however, might have the perverse effect of further delaying what needs to be done to help the displaced workers who gave Trump the mandate to disrupt free trade in the first place.

No amount of rejiggering to trade deals will solve problems like stagnant wages and rising inequality, as labor provisions in NAFTA and its successors already showed. USMCA’s sunset clause and stricter rules of origin are unlikely to make much more of a difference. But if that’s enough to placate Trump, US trading partners can keep dishing out those minor changes, without making expensive domestic policy changes that would actually keep workers from being left behind, like bolstering the social safety net and investing more in education.

“I’m glad to see that NAFTA has survived intact—ripping up the deal would have made matters much worse—but the modified agreement isn’t going to fix the underlying forces behind many voters’ economic frustration,” says Blanchard. “These trade wars are wasting precious time and distracting us from talking about economic policies that could actually help American voters.”