The new trade deal with Mexico (and Canada?): less than meets the eye

Color Claude Barfield of the American Enterprise Institute less than impressed:

Here’s a quick and dirty reaction to the White House announcement that it has reached a preliminary North American Free Trade Agreement (NAFTA) deal with Mexico, replete with President Trump’s usual hype: “A big day for trade, a big day for our country.” Five points (one positive, four negative):

(1) The best thing about the agreement — if it holds — is that it will remove the extreme uncertainty for businesses in all three NAFTA economies.

(2) The tentative “rules of origin” provisions for autos are an abomination — so complex and anti-competitive that they invite endless litigation and corruption (rules of origin govern what percentage of a final product must come from the three NAFTA nations).

(3) The old NAFTA dispute settlement system for investors has been gutted, leaving US industry and Congress with a huge dilemma as to whether to support the new pact.

(4) The auto/labor provisions (forcing Mexico to pay workers $16/hour for a number of jobs in Mexican auto plants, or four times the average hourly pay in Mexico) is a terrible precedent for mandating changes in domestic policy through a trade agreement.

(5) Where does this leave Canada and the evolved North American economic bloc? Trump is already referring to the deal as a US-Mexican agreement, with the possibility that Canada may be left out if it balks at the current terms. Some in Congress are already balking at this wholesale flouting of Congressional prerogatives.

From that depiction, it sure looks like more heavy-handed protectionism to me. I'll be scouting around for more reactions.

For instance, this is going to separate the economically literate from those grandstanding about a "good deal for the American people" when it gets to Congress, which is going to happen soon. There's also the matter of where Canada stands:

U.S. Trade Representative Robert Lighthizer says he will present the U.S.-Mexico deal to Congress on Friday, regardless of whether Canada is included. That official presentation starts a 90-day clock for Congress to review the deal and give a simple up-or-down vote. Because of that 90-day review period, any deal offered to Congress after Sept. 1 would not go into effect until after December 1, the date when Peña Nieto will step down as Mexico's president. Incoming Mexican President Andrés Manuel López Obrador would likely want to renegotiate the deal if it is not completed before he takes office.

Clearly, Friday is an important deadline. Trump and Lighthizer seem ready to press forward even if Canada is not on board, Mexican officials seem to have a different perspective. In a tweet, Peña Nieto emphasized the importance of having Canada be a part of the deal, and Ildefonso Guajardo, Mexico's economic secretary, told Politico that details of the trade deal would not be disclosed until "we finish with the position of Canada."

Trump's rhetoric during Monday's conference call and Lighthizer's determination to bring the deal to Congress on Friday seem like attempts to put pressure on Canada. "The Trump administration is trying to squeeze Canada by saying 'the train is leaving the station with Mexico, get on board or don't," tweeted Daniel Dale, the Toronto Star's Washington corespondent. But, he adds, it is "not clear Mexico has agreed to have the train leave the station without Canada."

Exactly. It seems pretty unlikely that Canada will agree to join this trade deal by Friday. Even though Canadian officials surely have followed the U.S.-Mexico negotiations from a distance, Prime Minister Justin Trudeau would seem to have little to gain by jumping on board after deliberately sitting out five weeks of negotiations. Doing so would appear to be giving into Trump's bullying and would be unlikely to play well in Canada, where Trump is deeply unpopular and Trudeau's willingness to push-back against the American president has won him plaudits.

That game of chicken gets more interesting because it's not clear whether Congress will sign-off on a two-way deal between the U.S. and Mexico. The U.S. Constitution gives Congress the authority to negotiate trade agreements, but Congress can grant the president what's known as Trade Promotion Authority" to negotiate deals like NAFTA. Under TPA, the White House is authorized to fast-track trade deals with other countries by negotiating them without congressional interference. Congress pledges to hold a straight up-or-down vote on the final product, essentially promising that it won't try to alter or undermine whatever deal the president makes.

Congress granted TPA for Trump to renegotiate a three-party trade deal. Trump might bring them a two-party deal and ask that they accept it instead.

"The agreement needs to include Canada as well," says Clark Packard, trade policy counsel at the R Street Institute, a free market think tank in Washington, D.C. "It's obvious that the chairmen of the relevant committees, Senate Finance and House Ways and Means, agree."

Unless Canada suddenly jumps on-board, it's virtually impossible for this trade deal to be ratified by Congress before López Obrador becomes Mexico's president. There are also the upcoming mid-terms in the United States, where a Democratic takeover of Congress would likely change the political calculus for any trade deals.

Always squeezing somebody, that's the Very Stable Genius way. And it's usually an ally.