The Real Game Trump Is Playing on NAFTA

- Februari 26, 2018

As the United States, Canada and Mexico head into the seventh round of the renegotiation of the North American Free Trade Agreement, there is a question increasingly looming over the talks: Why hasn’t Donald Trump pulled the plug already?

The president has made no secret of his loathing for NAFTA, calling it during the campaign “the worst trade deal in history.” He came very close to ending it nearly a year ago, in April 2017, but was reportedly talked down at the last minute by personal calls from Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto. Throughout the year, as the negotiations dragged past their original end-of-2017 deadline with no progress in sight, Trump continued to threaten withdrawal. As recently as the last round in Montreal in January, Canadian officials were telling reporters in advance that they were certain Trump was on the verge of pulling the U.S. out of NAFTA.

And yet, even with the president’s top trade negotiator acknowledging last month after the Montreal round that the talks are “progressing very slowly,” Trump now looks increasingly unlikely to leave the table. He told the Wall Street Journal that he was “leaving it a little bit flexible,” and acknowledged that it would be hard to conclude a new NAFTA prior to the July 1 Mexican general election. “There’s no rush,” he added. That could mean the talks will now drag on until 2019, since the new Mexican president would not even take office until December.

Is Trump getting cold feet, then, on NAFTA? That is certainly possible – pressure from pro-trade Republican members of Congress and from Republican governors from export-dependent states has been growing. Pulling out of NAFTA would generate a backlash within his own party, and would probably upset financial markets as well.

But there is another explanation. Whether by design or by luck, Trump is already winning the NAFTA renegotiation. It turns out the uncertainty over NAFTA’s fate is Trump’s friend. It is part of what appears to be a systematic – U.S. trading partners might say predatory – strategy to shift investment dollars to the United States.
I have had conversations with business leaders in recent weeks in which they all quietly acknowledge the same thing: Until they know what the new rules will be under NAFTA, they are likely to hedge their bets by locating new investments in the United States rather than in Canada or Mexico, just in case the rules change and they are frozen out of the largest North American market.

The most explicit move was the decision by Fiat Chrysler last month to move production of some Ram heavy duty pick-up trucks from Saltillo, Mexico, to Warren, Michigan, creating about 2,500 new jobs in the U.S. If NAFTA disappears, or the rules for automobile content are changed significantly as the Trump administration wants, a Mexican-made Ram truck could have faced a 25 percent import duty in the United States. Moving production to Michigan takes that risk off the table. Trump has taken credit for other decisions, like Toyota’s announcement of a new $1.6 billion car plant in Huntsville, Alabama, although that decision appears to have been in the works before Trump’s election.

Trade uncertainty might not be enough on its own to shift investment flows significantly. But the administration and congressional Republicans have been piling on the sweeteners.

The Republican tax bill Trump signed into law in December cut the headline U.S. corporate tax rate from 35 percent to 21 percent, moving the United States overnight from having the highest marginal corporate tax rate among the advanced economies to one of the lower rates. The tax bill included numerous other incentives, including immediate expensing of capital investments, which will make the United States a far more attractive location for new or expanded manufacturing plants.
The administration has also been pursuing an aggressive deregulation agenda, moving to roll back or eliminate regulations that are costly for many businesses, including elements of the Clean Power Plan, new overtime pay rules, workplace safety rules and fuel economy standards.

Perhaps most striking has been the Trump administration’s dollar policy. With occasional deviations, the United States has favored a strong dollar since at least the early years of the Reagan administration, with officials believing a strong currency was important for international financial stability and served as a bulwark against inflation. But at Davos last month, Treasury Secretary Steve Mnuchin explicitly abandoned that policy. “Obviously a weaker dollar is good for us as it relates to trade and opportunities,” he said in a press conference aimed at pitching the United States as an attractive investment location.

The statement was indeed obvious – all other things being equal, a weaker dollar makes the United States a more competitive place to do business for globally traded goods, and should increase investment and boost exports. And the markets seem to be listening. In the year since Trump took office, the dollar has fallen more than 10 percent against the other major currencies despite interest rate increases from the Federal Reserve, which normally drive the dollar up.
All of these add up to an aggressively pro-investment set of policies. The message to business is clear: There are dangers and risks to investing outside the United States and enormous incentives to get with the administration’s program.

Trump has, in fact, been quite explicit about his intentions all along. In his major campaign speech on U.S. trade policy in June 2016, in the once-thriving and now depopulated steel town of Monessen, Pennsylvania, he said that new trade policies were only one facet of his larger goal, to “make America the best place in the world to start a business, hire workers, and open a factory.”

Politically as well, uncertainty is the president’s friend. If he pulls the plug on NAFTA, he angers Republican allies and roils the markets. But if he does a deal, then he will have to pivot from being NAFTA’s biggest critic to being a cheerleader for the new agreement in Congress, which Democrats are all but certain to denounce as inadequate. A long negotiation in which he can continue to claim he is fighting for a better deal looks by far the best bet.

So what’s not to like? First, the strategy risks retaliation as Canada, Mexico and other U.S. trading partners catch on. Already, the United States is facing a flurry of complaints over its increasingly aggressive use of antidumping and countervailing duty laws to impose new tariffs on imports. The United States turned away from these “beggar thy neighbor” policies for a reason in the 1930s – while they might generate short-run gains, in the longer run U.S. leaders realized the country was better served by policies that enriched both the United States and its trading partners.

Secondly, the administration’s own protectionist impulses could undermine the strategy. The Commerce Department earlier this month recommended significant new, across-the-board tariffs on steel and aluminum imports, resurrecting an obscure 1962 law to claim that imports are damaging the U.S. industrial base and threatening national security. But steel is still the material of choice for automakers, and aluminum is increasingly popular. New trade restrictions that drive up domestic costs for manufacturers could more than offset the inducements the Trump administration has offered; other big losers would be construction equipment makers like Caterpillar, shipbuilders and the oil industry.

Finally, the administration will need to find an off-ramp. The NAFTA renegotiation cannot go on indefinitely; at some point the president will either have to bite the bullet and pay the political and economic cost of withdrawal, or accept some compromise deal that will be all but impossible to sell on the campaign trail if he seeks re-election. Neither option will be appealing for Trump.

But for the moment, the president has got a good game going. Expect him to keep playing it as long as he can.


 

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