Remember the last time America got knee deep in a trade war? Of course not. It’s been about 85 years since the United States engaged in one. In the 1930s, a pair of Republicans passed the “Smoot-Hawly Act” that upped egg tariffs from 8 to 10 cents. The move infuriated Canada who also upped tariffs and egg industry was decimated. When it was all said and done, those two Congressmen had plenty of egg on their faces.
Despite the tough talk about NAFTA and the loss of American jobs to Mexico, no one wants a trade war. There’s just too much unpredictable collateral damage and plenty of egg to go around. That’s why the three NAFTA countries will either renegotiate a new multilateral or pair of bilateral deals.
U.S.-Canada Trade Needs Tweaking
The United States and Canada enjoy some of the best relations of any neighboring countries. Trade has been a tremendous positive for business leaders and workers on both sides of the border. In fact, the North American nations saw approximately $627 billion worth of goods and services crisscross the border in 2016.
Canada was America’s top goods export market, and the overall financial gap was a moderate $12.5 billion surplus that favored Americans. Since the inception of NAFTA, U.S. exports have increased 165 percent. Given the success enjoyed by the relationship, why would President Trump want to renegotiate?
There are three reasons why the U.S.-Canada trade deal needs tweaking. First, it’s imbedded in NAFTA and that allows Mexico a more favorable trade environment than the higher standard of living and wages of the U.S. and Canada. Trump must change the structure of NAFTA to level the playing field with Mexico and that involves Canada.
The second reason is dairy. Canada’s dairy industry was left out of the NAFTA deal, and allowed the country to levy some tariffs on American imports such as unfiltered milk. In many ways, it has a protectionist policy that regulates the industry’s production. That leaves the American dairy farmer as the odd producer out, as the sharp decline in exports to Canada proves.
The third issue is the ongoing softwood lumber dispute. Canada subsidizes its lumber industry, and that has allowed northern loggers to undercut their American counterparts. The ongoing dispute has been running hot and cold since 1982. The U.S. has imposed countervailing duty tariffs to balance the price of lumber.
The latest tariff by the Trump Administration marks the fifth time the issue has come to a head. The most recent problem stems from the fact that a bilateral Soft Lumber Agreement expired three years ago. It needs to be renegotiated or renewed.
There are minor trade issues that have festered. They can easily be worked out through one-on-one talks with Canada. Fixing them via NAFTA may prove more difficult.
U.S.-Mexico Trade Is A Disaster
When President Trump calls NAFTA a “disaster”, he’s referring to how the trade deal has negatively affected American businesses, jobs and taxes. Unresolved trade gaps between the United States and its southern neighbor have been large contributors to this crisis.
Contrary to popular belief, NAFTA wasn’t President Bill Clinton’s brainchild. The agreement first surfaced during the Reagan Administration, who recognized that it hurt American jobs. President George H.W. Bush also scrapped it, saying it was bad for business. But the “globalization” movement during the Clinton years made this politically palatable.
At first, goods became less expensive. Then factories relocated, and the country suffered the loss of more than 700,000 jobs.
The modest trade surplus of $1.3 billion enjoyed by the U.S. pre-NAFTA bottomed out at a $74 billion deficit post-NAFTA, and hit $55 billion in 2016. But that seemingly powerful position doesn’t necessarily put Mexico in the negotiating driver’s seat. In fact, Mexico may be in a very unfavorable position.
The southern neighbor’s chief export to the U.S. is a top-heavy $74 billion in automobiles. The argument that stern border taxes on specific goods such as cars, trucks and SUVs would drive up costs doesn’t really hold water. The U.S. makes and imports cars from many countries. If Mexican-made vehicles cost more, consumer will likely switch brands. Such a move would profoundly hurt car companies more than consumers. Trump would likely garner more U.S. auto investment and claim a win on three fronts — jobs, tax revenue and GDP.
If Mexico were to respond in kind and spark a trade war, their strongest exports would be the slightly less than $110 billion in electrical equipment and machinery it ships north. Cheap labor has helped Mexico gain a strong foothold in this sector. However, Mexico does suffer a trade deficit on food such as corn, dairy and soybeans.
In other problem facing Mexico is that 90 percent of its exports head north. Canada is another major trading partner and border taxes could hit anything that travels over American soil. An economic war with the U.S. would erect a trade wall at the southern border.
Mexico’s President Enrique Peña Nieto has already begun to see carmakers pullout and expand in the United States. His job approval rating was nearly single digits at the start of 2017. If Trump rips up NAFTA, it would mean his political end. It’s imperative that Nieto negotiates a deal that at least buoys jobs and wages.
While the U.S. and Canada can resolve minor issues over a coffee, the last thing Mexico wants to do is get into an egg-throwing contest.
~ Conservative Zone
