Yesterday, the United States and Mexico agreed on a new trade agreement to replace NAFTA. As I write this column, it’s still too early to say what the impact of this new accord will be, as most of its details have not been released. But with that said, what we do know is enough to call into question whether this agreement will truly be a “better deal.”
Investor’s Business Daily gave us some insight into the plan:
The key to Monday’s new U.S.-Mexico Trade Deal — Trump wants to deep-six the name “Nafta” for good — is a thorough revamping of the rules for building cars in North America. Under the new deal between Mexico and the U.S., carmakers will have to source 75% of the content of cars from the U.S. or Mexico, up from 62.5% under Nafta.
The new accord also establishes a floor of $16 an hour for as much as 45% of the labor, in effect raising the cost of cars made in Mexico. It also grants new rights to Mexican labor unions, which will further raise labor costs.
In addition, the deal requires more locally sourced steel for making cars, along with plastics and chemicals. So we’ll be buying more stuff here and in Mexico, and less from other countries.
As we said, auto unions and U.S. automakers will be happy with all this. So will their suppliers.
Maybe not so much consumers, who already forked out about $31,400 on average for a new car in 2017, according to J.D. Power and Associates, an amount likely to rise sharply in coming years.
And in response, supply-side icon Dan Mitchell and AEI’s Claude Barfield explained their concerns:
Trump unveiled a quasi-deal on NAFTA yesterday, and it unquestionably will reduce economic liberty.
There’s a lot we still don’t know. Especially about whether this new agreement will actually get approved.
But Claude Barfield of the American Enterprise Institute has a very succinct explanation of the good and bad. He agree with me that it’s good to remove uncertainty.
(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.
And I’m guessing he also agrees that a weakened NAFTA is better than no NAFTA.
By the way, Administration officials have told me that there are a few good provisions, involving matters such as digital goods and property rights.
But Barfield’s list of bad provisions easily trumps (no pun intended) any positive changes.
(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.
Point #4 is especially terrible. It basically seeks to set wage levels above productivity levels in Mexico, which is a recipe for more unemployment in that already shaky economy (by the way, someone should tell Trump this will lead to more illegal migration from Mexico to the U.S.).
I agree with all of the concerns above, but it should also be stated that no free trade agreement was ever going to be entirely free of protectionism. “Free trade agreements” are (unfortunately) never perfectly free in the libertarian sense. This is why I have often taken to calling them “more trade agreements.” As more details emerge, let’s hope that in other areas of the proposal we will see significant reductions in tariffs and barriers.
But while we wait for more information, now is an opportune time to remind Congress that they have the legislative authority to stop Trump’s protectionist policies from being implemented. Yet, with the rare exceptions like Ohio Senator Rob Portman, there seems to be a frustrating complacency on Capitol Hill as the administration imposes new tariffs — even under the strange guise of “national security.”
While some might chalk this up to partisanship, this is trend actually pre-dates Trump. Congress has a long track record of delegating economic decisions of significant importance to, well, anyone but itself.
Instead of costly regulations getting voted on in the House and Senate, too often they are implemented via a “phone and a pen” in the agencies of the executive branch. Although the Constitution says “Congress shall have the power ‘to coin money, regulate the value thereof,” our Representatives punted that responsibility over to the Fed.
Whether it’s tariffs, costly regulations, or the value of our dollar, Congress has a long history of stripping itself of power on critical economic matters. Perhaps this should be a wake-up call to the legislative branch to take some of its power back.