Published on November 1, 2018. Click here to read the original.
Part of trade negotiations, at least between and among democracies, is post-agreement positioning. Usually, a balance is sought between assuring constituencies that you weren’t fleeced and that you didn’t fleece in return; the optimal takeaway being that all sides can claim a win. When negotiating with an American president who likes winning even when there’s no contest, the concept of win-win-win takes on new proportions.
Donald Trump likes winning. More precisely, he hates to lose. So much in fact, that if he hasn’t won, the game isn’t over. Since he became the president of the United States, the ruling class has rushed to read and re-read the Art of the Deal, hoping to use it as an owner’s manual of sorts—how to manage this disruptive force that is the leader of the free world. While it is simplistic to wholly subscribe to the narrative and strategies outlined in that book, they are at the very least illustrative. President Trump will not call the game until he has the most points on the board. September 30, the United States took the board in the renegotiation of NAFTA and the president both declared victory and the birth of the United States-Mexico-Canada-Agreement (the USMCA).
Does the final agreement reached by all three countries truly constitute a win-win-win?
In some cases, a win is avoiding a catastrophic loss—which is, at least in part, what the Mexicans and Canadians are pitching to their respective constituencies. Having the agreement in place is worth more than what was given up in the process. But that immediate high of having come to an agreement is quickly becoming a challenge to maintain. While both Mexico and Canada can count places where they gave up significant ground, it’s hard to find an area where the United States walked away worse off than when they arrived.
Each country had to bring an agreement back to their respective electorates that would symbolize victory for their domestic political equities. Mexico scored with the positioning that it was the partner that essentially made the deal possible, first by agreeing to an Auto Rules of Origin chapter that significantly reduces Mexico’s advantages for manufacturing investment and then by bringing Canada back to the table.
Canada scored by securing an agreement in the wake of what was largely assumed to be a bilateral end-game with Mexico and maintaining the dispute resolution mechanism previously known as Chapter 19. The United States scored by securing above all a more restrictive rules of origin regime for textiles and autos, increased market access for agricultural products, and greater protection for intellectual property.
What did each country give up? The Mexicans agreed to auto rules of origin that will likely drive investment north, and to more robust labour standards, including legislating the ability to bargain collectively. The Canadians gave the Americans access to 3. 6 per cent of their dairy market and more significantly, agreed to the dissolution of class 7, a relatively recent creation that was a significant irritant in the bilateral relationship. In addition, Canada agreed to higher standards on intellectual property protections, and broader restrictions on data localization.
It is less clear what the United States gave up. They backed off on aggressive proposals for U.S. content in the automobile rules of origin, the sunset clause, and government procurement. Peanut, peanut butter and sugar tariff rate quotas (TRQs) were increased, allowing Canada greater access into the U.S. market. The United States also accepted more moderate increases in de minimis levels, rather than pushing for the other two partners to match the $800 U.S. rate on online import orders. And, notably, the United States allowed for the continuation of a dispute resolution mechanism that many within the Trump Administration consider to be an attack on U.S. sovereignty.
But then there are the side letters on the process for future American use of section 232 of the Trade Act of 1974. These are significant and a win for the United States at the expense of the Canadians in particular. Section 232 allows for the U.S. President to unilaterally assign tariffs on goods should the Department of Commerce determine that imports of that good are creating a national security threat. This is the same section of U.S. law that provided President Trump with the authorization to implement 25 per cent tariffs on steel and 10 per cent tariffs on aluminum. Canada has, from the beginning, argued that because of the unique bi-national nature of the North American Aerospace Defense Command, it is part of the American national security establishment, not a threat to it. The side letters on the process and TRQ for autos in the event of a 232 decision on auto imports only enshrine the U.S. argument that Canada (and Mexico) and their exports have the potential to be a security threat.
It is also worth noting that the steel and aluminum tariffs remain. While Minister Freeland and the USTR continue to discuss a path forward, even the political pressure of the retaliatory measures imposed by Canada has not appeared to be sufficient to hasten a conclusion. Kentucky Governor Matt Bevin, while calling the Canadian retaliatory measures a “cash grab” in an interview with CBC, also acknowledged that all tariffs are revenue producers.
The United States is having a rough time with its books in the Trump era. Tax cuts accompanied by increased spending on bloated military and homeland security budgets have combined to run up the national debt by 9 per cent (to $1.4 trillion despite economic growth rates that almost doubled (from 2.2 per cent in 2017 to 4.2 per cent in 2018). The federal coffers need funds and the tariffs are providing those funds readily—more so with every tranche of tariffs announced. In other words, those 232 tariffs and the diplomatic headaches they may have caused may be worth every penny for the U.S.
This is the reality of the Trump era: free trade is no longer an aspiration. Managed trade is the future. Not only did the USMCA define a framework for how the three partners will trade with each other, it also dictates, at least in part, how the partners engage in trade with the world. The North American integrated supply chain may appear to have been saved, but it will have to adjust to absorb the impact of the changes in this agreement. In the end, there should be no doubt that Donald Trump won, but on the question of whether or not this was a win-win-win, the only answer may be the argument that no one can prove. Are we better off with it than we would have been without?