As the Trump Administration ratchets up trade tensions between with China, it is quickly abandoning its most hardline positions during NAFTA renegotiations with Canada and Mexico, according to reports this week in Bloomberg and the Wall Street Journal.
U.S. trade negotiators are trying to paper over differences in order to announce a revised NAFTA agreement at the Summit of the Americas that begins April 13th in Peru. To that end, the Trump Administration is backing off its demands that tariff-free light vehicles contain 50% U.S.-made 85% North American-made content, and that the trade bloc’s investor-state dispute settlement (ISDS) be abandoned.
U.S. Trade Representative Robert Lighthizer willingness to back down from the two proposals which had the most realistic chances of bringing industrial production back within the borders of the United States suggests the Administration is finally recognizing the political realities that have made reform of the international trade system such a difficult and time consuming process.
These political realities could, of course, be foreseen. The same bellicosity that President Trump used to elevate trade agreements to an issue of national importance also served to make it impossible for the Canadians and Mexicans to be seen as giving up anything of value in NAFTA renegotiations. Meanwhile the constraints of the political calendar, with Mexican presidential elections on July 1st and U.S. congressional elections this fall, have created a very short window for substantial negotiations to occur.
Time has now run out, and Lighthizer is scrambling to find a new approach that can be quickly agreed to and painted as a victory for an Administration hungry for accomplishments going into the November midterms. According to a report Tuesday in the Journal, the latest idea is to focus on labor standards. “Following opposition from Canada and Mexico to an initial U.S. proposal that would require light vehicles to contain 50% U.S. content to cross U.S. borders duty-free, the U.S. has changed its proposal on autos to one that would require certain parts of vehicles to be made in zones with high wages averaging $15 an hour,” the report reads. “In the new proposal, automakers would receive credit toward duty-free content if worker pay meets that threshold. The idea is to both lure more auto jobs back to the U.S. and also create an incentive for higher wages in Mexico to address complaints from auto unions that jobs have drifted south for cheaper labor.”
The focus on labor standards is a canny idea for several reasons. The first is that the absence of rising productivity and wages in Mexico is indeed one of the failures of NAFTA, which has robbed the U.S. of the benefits predicted by the deal’s proponents a quarter of a century ago. It will also make it difficult for the left to enthusiastically denounce the administration’s efforts on trade, as Democrats and their union backers have long argued for forceful action to raise labor standards in Mexico.
Any deal that appears to undercut Mexico’s strategy of boosting domestic employment by suppressing wages would be on-brand for Trump, but serious questions remain as to whether amending NAFTA can arrest the global macroeconomic forces that have bled America of industrial employment and kept a lid on worker pay around the world.
Economists who have studied the effects of NAFTA, like the Wharton School’s Mauro Guillen argue that the North American car industry has been saved by low wages in Mexico, and that without NAFTA, the U.S. would have bled even more automotive jobs to Asia than it has to Mexico. This dynamic illustrates the central failure of the Trump Administration’s trade policy, which is the inability to see America’s large trade deficits as a product of a global trade system in which dozens of countries are competing over a limited number of jobs. In other words, convincing the Mexicans to pay higher wages will do nothing to raise pay in Germany, to stop the Japanese from suppressing the value of the yen, or the Chinese from lavishing subsidies on strategic industries.
We have now therefore entered the stage of Trump trade policy wherein officials will begin touting their retreats as victories and minor reforms as major wins for the U.S. worker, even as the U.S. trade deficit continues to climb. The only question mark remaining is just how the president will spin these failures as evidence of his genius and dealmaking chops.
Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.