US trade policy

The Five Lessons of NAFTA Negotiations

The Five Lessons of NAFTA Negotiations

The third lesson is that the details matter. Some of the provisions that are currently being ignored by commenters on NAFTA are buried deep in the texts and schedules.  These may turn out to be deeply consequential for NAFTA parties.  Some may also affect outside parties.  As an example, the auto rules of origin require a significant and growing share of autos, trucks, parts, components, steel and aluminum to be made within NAFTA (with more expensive labor inputs as well).  For suppliers based outside of NAFTA, this is going to be extremely problematic or even catastrophic.  These orders could be cancelled outright and never replaced. Alternatively, NAFTA 2.0 could force a renewed look at offshoring or sourcing entirely for export.  Either way, existing supply chains are likely to be under severe stress.

The fourth lesson is that NAFTA contains some problematic provisions that might spread elsewhere.

Evaluating Trade Deals Like NAFTA 2.0

Evaluating Trade Deals Like NAFTA 2.0

Since NAFTA 2.0 builds on the base of the original NAFTA, the new deal had some advantages over the TPP.  For example, tariffs between the parties are already set at zero.  This remains, although do note that there are very complicated tariff rate quotas in place in NAFTA 2.0 that were not scrapped.  Indeed, the level of genuinely new market access granted to partners that have known and worked with one another for decades is vanishingly small.  While much focus, as an example, has been on Canada’s new market access for dairy, the total amount given amounts to barely 0.4%.  And the United States, in return, has an equally complex system of barriers in place to protect its own dairy industry from competition (as well as sugar, oranges, and others). The deeply problematic bits of the agreement can be found buried in the texts.  For instance, the rules of origin (ROO) are incredibly complicated.  Given that tariffs are zero, the only way to keep out goods is to craft ROOs that are impossible to follow. Clearly, for many products, this objective has been met. The level of NAFTA content required in fairly large swaths of products is extremely high.  Commentators keep focusing on the insane requirements for auto production, but note that for a wide range of goods, new NAFTA content rules require 50% or more content.  To make matters worse, in many products, these rules tighten after 3 years, rising to as much as 70% local (ie NAFTA) content.

Second and Third-Order Tariff Impacts: Shutting the Gate Damages Us All

The implications, as the Singaporean trade minister noted, can be hard to calculate.  For instance, American importing companies will need to increase the amount of the continuous bond they hold with US Customs.  In some cases, bond levels may be 20-100 times higher than prior to Trump’s tariff wars began. Shipping volumes have fallen off dramatically.  This has left firms paying more for transportation as well. So it is not just 25% tariff rate increases that affect firms.  The second- and third-order implications are just starting to appear. In the short run, exporting firms have several options to limit risk and exposure to higher tariffs.  They can do nothing and bear higher costs, hoping to ride out a short conflict.  They can work with their importing partners to effectively “share” the costs of higher tariffs. Firms should be reexamining their options to ensure that they understand their current supply chains, tariff classifications and possible sourcing alternatives.  It may be prudent to tweak existing processes to move products into new tariff classifications by, for example, adding or subtracting manufacturing steps in the supply chain from one location to another.

Trade War Escalates Again: $200 Billion Announced by Americans

Hence, writes Lighthizer, the need for another $200 billion in products on today’s list.  Why?  Because China cannot respond in the same measured way to a trade escalation of this magnitude.  China does not import $250 billion in goods trade from the United States and cannot match US tariff escalation dollar-for-dollar. Therefore, it seems clear that Lighthizer believes that China will now respond “appropriately” to the original set of American complaints under the Section 301 report and stop counter-retaliating. This line of argument, however, remains deeply flawed for at least four reasons. First, simply because the Chinese cannot retaliate using tariffs to match the US escalation does not mean that the Chinese cannot retaliate.  They have myriad tools at their disposal to respond, as we have pointed out in previous Talking Trade posts.  These include targeting US services, US companies on the ground in China, US investments and so forth. 

$34 Billion + $34 Billion = More Than Just Rhetoric

Now that tariffs have been imposed, negotiations have not started.  Instead, Trump seems determined to continue to escalate.  Rather than make movements towards resolving issues, he has now threatened to impose tariffs on every product imported from China—all $500 billion. Since China does not import an equivalent amount of goods from the United States, it cannot simply match tariff rate hikes to tariff rate hikes.  It will end up getting creative instead, assuming President Trump follows through on his threats and keeps ratcheting up tariffs on Chinese made goods. China could respond in many ways.  It can scrupulously enforce myriad domestic laws against American companies in China that are currently only weakly followed now.  It could much more rigorously check for compliance with every regulation, type of paperwork and so forth.