NAFTA 2.0 and US Trade Policy

NAFTA vs the USMCA

On March 12, 2019, I went to an event sponsored by the Cleveland Council on World Affairs at the Union Club. The speaker was Dr. Geoffrey Gertz, a Fellow at the Brookings institute and an expert in international relations and economics. The topic for the night was “NAFTA 2.0 and the Future of American Trade Policy.”

Dr. Gertz began his talk by clearly outlining the topics he wished to cover: the original NAFTA (North American Free Trade Agreement) and the new USMCA (United States-Mexico-Canada Agreement), the relationship between the USA and China, and the general direction of American trade policy.

Regarding the original NAFTA agreement of the 1990s, Dr. Gertz noted that the general consensus is that it was a net good for the country, leading to lower costs for consumers and helping to shift jobs from manufacturing to service industries. Overall, the total impact was rather small; however, Dr. Gertz observed that the political impact of these trade deals is often much greater than their economic effects.

However, during his campaign and administration, Donald Trump called NAFTA the worst trade deal in history and promised that he would replace it with a much better deal. Now, negotiations on the USMCA have closed and economists like Dr. Gertz have studied both agreements. What is their conclusion? Well, there is a reason that the USMCA is often referred to as NAFTA 2.0: very little has changed beyond a few expected updates to digital commerce and some very minor concessions from Canada and Mexico.

Donald Trump’s supposedly amazing replacement for the supposedly terrible original NAFTA, is almost indistinguishable from it. As such, there is little incentive for the legislatures of Canada and Mexico to ratify the agreement: the old agreement is perfectly acceptable, so why make a fuss over the new one? Indeed, the US Congress might have trouble: Dr. Gertz observed that there are reasons for both parties to dislike it. He noted that the changes, while small, are closer to the Democrat’s theoretical “ideal” trade situation; however, passing it would give a major victory to the Trump administration. Republicans have the opposite problem, the substance of the agreement is unpalatable to many, but their president supports it.

The only reason it is likely to pass in Canada and Mexico and perhaps in the United States, is because Trump has threatened to withdraw from NAFTA altogether, which would be a disaster. The agreement also contains another crucial clause, Chapter 32, article 10, that allows the other parties to withdraw should one of the nations make an agreement with a “non-market economy.” Dr. Gertz explained that “non-market economy” is thinly veiled code for “China.” In this agreement, the United States does not want either Canada or Mexico making deals with China.

The China Question

Dr. Gertz felt that the question of China was much bigger and more important than agreements with Canada and Mexico. At the same time that the original NAFTA was passed, American policymakers felt that integrating China into the global economic system might force them to liberalize their economy and thence their political system. Unfortunately, this has not come to pass.

Our speaker this evening agreed with Trump rhetoric that it was not time to “get tough” on China, but disagreed with his methods. Dr. Gertz did not think that current talks will lead anywhere meaningful and was disappointed that Trump has been alienating potential allies instead of working together with these nations that also want to deal with China. He also noted that there was little that we can do, anyway, since China seems perfectly happy to continue their policy.

US Trade Policy

Touching briefly on US trade policy overall, Dr. Gertz noted that the United States should remain committed to free trade worldwide, rather than the protectionism that has become common in the current administration. He said that the two most important things for the US to “get right” in the coming decades were policies about China and Climate Change.

Unsurprisingly, many of the questions during the Q&A centered on China, since it is indeed such an important issue. Dr. Gertz was also worried about the future of the World Trade Organization. He felt that it had become too slow and bureaucratic in many ways and needed to be more efficient. He also noted that the WTO was not meant to deal with countries and economies like China. Regarding climate change, he pointed out that green policies can often appear protectionist. The WTO has lately had to decide whether certain policies are bona fide environmentalist, or whether countries are just using it as an excuse to get away with protectionism.

Overall, it was certainly a thought-provoking evening. Dr. Gertz is certainly not alone in noting that policies on climate change and China are of paramount importance going forward.

By Justin Faulhaber
Margaret W. Wong & Associates