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Friday, November 16 , 2018, 5:01 pm | Fair 66º

 
 
 
 

Lou Cannon: High Risks for States in NAFTA Talks — on Trade, Economy

With the fate of the North American Free Trade Agreement, or NAFTA, hanging in the balance, trade experts and U.S. governors are warning that industrial and farm states would suffer economic damage if President Donald Trump carries out his threat to scrap the three-nation treaty.

A third round of negotiations to update the 23-year-old treaty is scheduled to begin in Ottawa on Sept. 23. The negotiators claimed unspecified progress in the first two rounds of talks in Washington and Mexico City but have yet to tackle the tougher issues, such as a U.S. demand to increase the use of U.S.-made materials in automobiles and other products.

Trump’s provocative attacks on NAFTA have not been helpful, said Wendy Cutler, a veteran U.S. trade negotiator. He has called NAFTA “the worst treaty in the history of the world” and irritated Mexican leaders by trying to link it to his campaign promise to build a “big beautiful wall” on the U.S.-Mexican border that would be paid for by Mexico.

Trump has also criticized Canada.

“What they’ve done to our dairy workers is a disgrace,” he said.

Trump, who prides himself on deal-making, may be pursuing a negotiating strategy designed to force concessions. But the strategy, which The Economist calls “odd,” could backfire.

Cutler said Trump’s repeated putdowns of Canada and Mexico make it difficult for leaders of these countries “to muster the political support they need to make meaningful concessions.”

Negotiated by President George H.W. Bush and signed by President Bill Clinton in 1994, NAFTA eliminated most tariffs on products traded among the United States, Canada and Mexico.

Liberalization of trade in agriculture, textiles and automobile manufacturing was a major focus. The treaty also sought to protect intellectual property and established dispute-resolution mechanisms.

Trade among the three countries has quadrupled under NAFTA and cross-border investment has surged.

States have an enormous stake in preserving NAFTA, particularly border states such as Texas and Michigan, whose exports to Mexico and Canada account for a large share of their domestic economy.

Texas, where NAFTA enjoys bipartisan support, was the nation’s top exporting state based on total dollar value in 2016, sending nearly $93 billion in exports to Mexico. The Lone Star State imported $81 billion from its neighbor south of the border.

Michigan stands to lose more than any other state if NAFTA is scrapped, according to the credit rating service Fitch Ratings. The state sent 43 percent of its exports to Canada and 22 percent to Mexico. Fitch cited the state’s global role in the automotive sector and its proximity to Canada.

Texas and Michigan voted for Trump in the 2016 election. So did North Dakota, the top exporter to Canada by volume, at 82 percent.

In addition, Farm Belt states such as Indiana, Iowa, Kansas and Nebraska are major exporters of agricultural products to NAFTA partners. Trump also carried these states.

Raw numbers of exports and imports don’t tell the full story.

The three NAFTA nations are involved in a complex supply chain involving high-volume trade in “intermediate goods,” materials that companies import and integrate into a finished product. For example, workers in South Carolina and Tennessee may have made half the parts in an automobile assembled in Mexico and then imported into the United States.

Illinois, Michigan, New York, Ohio, Texas and Washington all import more than $15 billion in intermediate goods, accounting for half the nation’s total.

“Given the large size of their economies, disruptions to trade in these states have significant potential to influence national economic growth,” a Brookings Institution analysis concluded.

The United States imports more from Mexico than it exports, resulting in an annual trade deficit. That deficit was $55.6 billion in 2016. The United States had a $12.5 billion trade surplus with Canada.

Trump’s case against NAFTA rests on two assertions: that any trade deficit is harmful and that the treaty has caused job losses in the United States.

Most economists flatly reject the first contention. They say a trade deficit is at best a partial measurement of a treaty’s value and observe that the U.S. trade deficit with Mexico was relatively low during the Great Recession of 2009 and increased as the U.S. economy recovered.

NAFTA provides American consumers with a greater variety of goods at lower prices, they say.

But Trump’s point about job losses caused by NAFTA resonates with organized labor, particularly automotive workers.

The United Auto Workers and Canada’s Unifor, which together represent 245,000 workers in the industry, have issued a statement calling for “meaningful renegotiation” that would address the disparity of U.S. and Mexican wages. Autoworkers in the United States make $18 or more an hour compared to $4 an hour for their Mexican counterparts.

“No amount of spin can erase the fact that NAFTA cost hundreds of thousands of jobs and the closure of thousands of U.S and Canadian manufacturing facilities,” the union statement said.

“NAFTA renegotiations will only be successful if they lead to higher wages in all three countries, reverse crippling trade deficits with Mexico, and create new manufacturing jobs in the U.S. and Canada.”

Labor economist Brad DeLong of UC Berkeley disputes the claim that NAFTA is responsible for heavy job declines in the automotive and other U.S. manufacturing sectors. He notes that manufacturing jobs fell for 40 years before NAFTA, mostly because of mechanization.

DeLong cites data that puts the net U.S. job loss attributable to NAFTA at 100,000, about 0.1 percent of the U.S. labor force.

But thousands of new jobs that NAFTA has created are scattered across the United States, while job losses have been concentrated in Michigan and other Rust Belt states.

Blue-collar resentment of NAFTA helped challenger Bernie Sanders upset Hillary Clinton in the Michigan Democratic primary in 2016 and may have been a factor when Trump edged Clinton in Michigan by 10,074 votes.

U.S. public opinion of NAFTA has become more favorable since the election, with slight pluralities favoring the treaty, according to surveys conducted by Gallup and the Pew Research Center.

In the Pew survey, two-thirds of Democrats saw NAFTA as beneficial to the United States; slightly less than a third of Republicans agreed.

NAFTA is heavily favored by majorities in Canada and Mexico, according to Pew polls in these countries.

One hope for saving NAFTA is that the three countries may be able to draw upon progress made in the negotiation of another trade pact, the 11-nation Trans Pacific Partnership, or TPP.

Trump withdrew the United States from the TPP on the first day of his presidency. But part of the TPP included modernization of NAFTA, and negotiators had made headway in updating NAFTA’s labor, environmental and customs chapters. These could be picked up in the NAFTA re-negotiation.

Even NAFTA’s most ardent boosters agree that some changes are needed. E-commerce was virtually nonexistent when NAFTA took effect and customs assessments were made on pen and paper rather than electronically.

U.S. trade representative Robert Lighthizer has made it clear, however, that he wants more than tweaking. He has called for substantial changes on NAFTA rules for importing auto parts, higher labor standards and a new dispute-settlement process that respects sovereignty of individual countries.

Alternating meetings in the three countries, NAFTA negotiators hope to wrap up work by Dec. 31.

If they fail to meet this ambitious deadline, progress could be problematic in 2018 when Mexico will be preoccupied by campaigning for the presidential election on July 31. President Enrique Peña Nieto, who has jousted with Trump, is ineligible to succeed himself.

If the negotiators fail to reach agreement, Trump has threatened to withdraw the United States from NAFTA.

That wouldn’t be easy. In theory Trump could invoke Article 2205 of NAFTA, which says a country can withdraw from the agreement six months after giving written notice. But such notice would be likely to provoke congressional and legal challenges and cause disarray in major industries.

Warren Maruyama, a Washington lawyer who worked on trade issues in both Bush administrations, told the Los Angeles Times that Trump’s threat to pull out of NAFTA was not credible.

“Trump would do serious political damage and split the coalition that got him into the White House,” he said. “While his win is often credited to anti-trade, blue-collar voters, he won just about every rural county, and Mexico is a huge market for American farm products.”

Maybe so, but as Cutler observes, Trump is unpredictable and it would be better not to test him. Everyone will breathe easier if negotiators can make sensible updates to NAFTA, avoiding the peril of withdrawal and allowing all three countries to claim victory.

Lou Cannon, a Summerland resident, is a longtime national political writer and acclaimed presidential biographer. His most recent book — co-authored with his son, Carl — is Reagan’s Disciple: George W. Bush’s Troubled Quest for a Presidential Legacy. Cannon also is an editorial adviser to State Net Capitol Journal, which published this column originally. Click here to read previous columns. The opinions expressed are his own.

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