Did the USA really get such a bad deal under NAFTA that it had to impose tariffs against Canada and Mexico?

President Donald Trump argues that the USA is getting a raw deal under NAFTA because its balance of trade is in a deficit position with the other two countries. (I can’t speak for Mexico, but Canada is actually in a deficit with the USA, not the other way around). Nonetheless, the claim bears commenting upon.

First, the argument is specious because a trade imbalance merely means that the residents in the “deficit” country are spending more — resulting in foreign imports — and saving less. This is exactly the situation the U.S. finds itself in today, at least according to Trump.

Second, Trump sells America on tariffs by claiming they will create more jobs.  This is misleading.  Sure, they’re expected to create 70,000 new jobs in steel production.  But they’re also expected to destroy 190,000 jobs in metal fabrication.

Third, there is no such thing as “free” (i.e., uninhibited) trade. What we have is liberalized (i.e., opened up) trade. Canada, under its supply management system, is protectionist of its dairy products, much as the EU is of many products under its Common Agricultural Policy. This is one of the loopholes, if you like, in both the WTO and NAFTA. (Personally, I would not be sorry to see it go, but it seems to be an impossible feat politically.) Under the guise of addressing this perceived (but permitted) unfairness, the Trump administration is imposing punitive tariffs on aluminum and steel. In trade lingo, it’s an asymmetrical response, i.e., one that does not address the problem and only serves to create trouble “where there ain’t none”.

Third, the USA itself doesn’t come to the bargaining table with clean hands. For decades, it has imposed unlawful punitive tariffs on imports of Canadian softwood lumber. No matter how many times Canada wins in front of NAFTA dispute settlement panels, the USA refuses to obey their judgments, and Canada has to pay the unlawful tariffs — in large part anyway — every time.

Fourth, the Trump administration is relying on the get-out-of-jail-free card in NAFTA and the WTO -- of national security -- to impose the tariffs. But to pretend that Canada, or any other of America’s closest allies, present a military threat to the USA is disingenuous in the extreme and, in the words of Canada’s prime minister, “insulting.”  For this reason, Canada has initiated trade cases before both the WTO and NAFTA on its misuse.

Fifth, regarding the renewal of NAFTA, the Trump administration has not been bargaining in good faith. Ostensibly, these tariffs are intended to pressure Canada and Mexico to accept the USA’s bargaining offer. But that offer was like an offer from the Cosa Nostra. If I understand correctly, there were at least three things that made it unacceptable to Canada and Mexico:

 

a) the USA wanted the content requirement for automobile manufacturing raised from 50% American to 75% American. On the surface, this might not sound unreasonable, but in my experience the most difficult part of NAFTA was the rules of origin (ROO) provisions. It would take an army of accountants to keep tabs on compliance with the new rules; even after the whole supply chain arrangement was reworked, if even possible. (If you thought Sarbanes-Oxley or Dodd-Frank was a problem, multiply it by ten and you’ll get the picture).

b) the USA wanted a five-year “sunset” on the renewed agreement. In other words, NAFTA would expire after five years, unless agreed by the parties to be extended. Again, in theory that may not sound unreasonable, but business markets are founded on predictability and certainty. It would have been impossible to agree to this.

c) the USA wanted to tinker with the dispute settlement provisions so as to stack the deck in its favour. In my experience, if the U.S. is not winning all if its cases, then they will want to blame the system itself. Who in their right mind would agree to change the system so that the other side was virtually guaranteed a win?

These are the things that Commerce Secretary Ross wanted Canada and Mexico to “come to their senses” and agree to, failing which the 10% and 25% tariffs would be (and are now being) imposed.