Besides getting Mexico to pay for the wall, which continues to elude him, there were two things that U.S. President Donald Trump seemed to want most out of the renegotiation of the North American Free Trade Agreement. One was increased accessto the Canadian market for American dairy farmers, and the other was an incentive to increase car production in the United States. He won on those things, though the latter could well turn out to be a pyrrhic victory. But he is undercutting any credit he might get for those victories with his fondness for tariffs. Indeed, if looking tough for his political base continues to eclipse all else, the president could lose the chance to replace the NAFTA he hates with the one he says he loves, at least for now.
In trying to unravel the mystery of what Trump really wants to achieve with his trade tactics, the NAFTA case deserves a closer look. When Trump initially declined to exempt Canada and Mexico from the tariffs on steel and aluminum, imposed on supposed national security grounds, most observers assumed he was using them as leverage to get a better deal in the NAFTA renegotiation. But the new deal—rebranded as the U.S.-Mexico-Canada Agreement, or USMCA—was signed in Buenos Aires on Nov. 30 and, so far at least, the tariffs remain in place. So too do the retaliatory tariffs that Canada and Mexico imposed on carefully chosen American exports.
Dairy farmers in Wisconsin, the home state of outgoing Speaker of the House Paul Ryan, were among those that found themselves in the crosshairs. Under NAFTA originally, Mexico removed its barriers to agricultural imports from the United States. By 2017, it was buying a quarter of all U.S. dairy exports. When the Trump administration imposed the tariffs on steel and aluminum, Mexico retaliated with 25 percent tariffs on American cheese. Canada, in turn, targeted yogurt and chocolate. The president of the trade group representing the American dairy industry welcomed conclusion of the USMCA given the increased access it will provide to the Canadian market. But he noted that the benefits would be offset as long as the retaliatory tariffs on its exports in North America remain in place.
Why is Trump maintaining tariffs that serve no obvious purpose and undercut the achievements about which he seems to care the most?
The steel and aluminum tariffs undermine Trump’s self-described “ground-breaking achievement” in the auto sector more directly, although like Mexico paying for a border wall, this is something that few outside the White House perceive as a real achievement. The new rules of origin on cars raise the minimum regional content of automobiles that can be traded under NAFTA without duties from 62.5 percent to 75 percent. They also require that a portion of that content must be produced in plants where workers earn at least $16 per hour. The intent behind the latter provision is to encourage some production to shift from lower-wage Mexico to the United States, or Canada.
But these new rules of origin will raise costs, increase car prices and lower the competitiveness of U.S.-based production. Keeping the steel and aluminum tariffs in place, regionally as well as against the rest of the world, exacerbates those effects. Even the United Steelworkers union opposed tariffs on imported Canadian steel.
In addition to undermining these narrow sectoral priorities, the ongoing trade skirmish with Canada and Mexico is making it harder to convince Congress to ratify the USMCA. Strong business community support is always an essential ingredient in convincing Congress to approve trade agreements. But the U.S. Chamber of Commerce refused to commit to lobbying on behalf of the USMCA for weeks after the negotiations concluded, in part because its members do not like the protectionist rule of origin for cars. The chamber finally issued a statement supporting the agreement on Dec. 10, but it made its support contingent on the lifting of the steel and aluminum tariffs. That same week, 31 other business and trade associations joined it in sending a letter to the U.S. Trade Representative’s office calling for the lifting of the tariffs as part of the push to implement the deal.
In the face of this pushback, Trump did what he usually does and escalated by announcing he would soon begin the process of withdrawing from the old NAFTA. The president’s authority to unilaterally undo trade agreements is questionable, so it could take some time for the courts to sort it all out. In the meantime, the threat creates uncertainty and the potential for significant economic disruption if Trump follows through on it. And when it comes to ratifying the new agreement, trying to present Congress with an all-or-nothing choice is not playing well on Capitol Hill, especially with incoming Speaker of the House Nancy Pelosi. Even the administration’s chief trade negotiator, Robert Lighthizer, has not embraced Trump’s strong-arm tactics.
Compared to the original agreement, the updated and rebranded NAFTA essentially does three things. It retains the core of the original in terms of market access, and many of the rules. It follows the template of the Trans-Pacific Partnership, which Trump abandoned right after taking office, in adding or updating rules in areas that have become increasingly important since NAFTA was signed in 1992, such as digital trade and biologic drugs. And it attempts to rebalance trade in two sectors where Trump claims the United States got a raw deal: dairy and automobiles. Why, then, has Trump insisted on maintaining tariffs that serve no obvious purpose and undercut the achievements about which he seems to care the most? The mystery only deepens about what Trump really wants from his tariffs and trade policy, and what his strategy is for achieving it.
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