Publish in Commentary - Wednesday, April 26, 2017
Donald Trump to AP last week: "I think NAFTA has been a catastrophic trade deal for the United States." (Photo: The White House)
Mixed signals from unpredictable president hurts US-Mexico business.
Mexico is in a better spot then right after the November 8 presidential election in the United States, but worse than before.
The seeming contradiction is due to erratic rhetoric and policies of US President Donald Trump.
While the first 100 days of Trump’s presidency have not brought a renegotiation of the North American Free Trade Agreement (NAFTA) and have even brought conciliatory signals from key Trump aides, the uncertainty remains.
After months of positive signals that the Trump Administration was looking for relatively minor changes to NAFTA – rather than a dramatic overhaul – Trump himself again signaled that he planned to tear up the agreement, which unites the economies of the United States, Mexico and Canada in one free trade zone.
“I am very upset with NAFTA,” Trump told AP. “I think NAFTA has been a catastrophic trade deal for the United States. (...) It hurts us with Canada, and it hurts us with Mexico. (...) I am going to either renegotiate it or I am going to terminate it. (...) If they don't treat fairly, I am terminating NAFTA.”
And on April 26, Politico and other media reported that The White House had pepared an executive order on withdrawing the U.S. from NAFTA. The draft order appeared designed to extract better terms with Canada and Mexico. Peter Navarro, the head of Trump’s National Trade Council, drafted the executive order in close cooperation with White House chief strategist Steve Bannon. Both Navarro and Bannon are known for their protectionist views.
"The draft executive order could be a hardball negotiating tactic designed to bring Mexico and Canada to the table to renegotiate NAFTA," Politico said. "But once Trump sets the withdrawal process in motion, the prospects for the U.S. pulling out of one of the largest trade deals on the globe become very real."
Meanwhile, The White House is expected to soon take a separate step by signing a letter to Congress that would notify lawmakers of the administration's intention to renegotiate NAFTA, The Washington Post reports. "By signing an intent to renegotiate and an intent to withdraw, the White House would give itself more flexibility to choose a different outcome in several months," the paper wrote.
After an uproar among Congressional Republicans over the draft order for the NAFTA exit, Trump called the leaders of Mexico and Canada late Wednesday afternoon to tell them that he does not intend to withdraw from NAFTA "at this time," Politico reports.
With his comments last week, and the NAFTA exit draft order this week, Trump had set back progress made between Trump officials like Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross and their Mexican counterparts.
On April 21 – the day before Trump gave his NAFTA-critical interview with AP – Mnuchin held two separate meetings with Mexican Finance Minister Jose Antonio Meade and Mexican Central Bank Governor Agustin Carstens.
"Mnuchin and Secretary Meade discussed the importance of strengthening both the U.S. and Mexican economies and the opportunity to improve NAFTA, including in the financial services sector," said one statement. "The Secretary underscored the closeness of the bilateral relationship and working together on a thriving commercial relationship," said the statement on the meeting with Carstens.
That contradiction comes as Ross and White House spokesman Sean Spicer last month went out publicly against a proposal sent to the US Congress by Acting US Trade Representative Stephen Vaughn that signaled only modest changes to NAFTA. Ross and Spicer denied that the proposal represented Trump Administration policy.
In other words, 100 days into Trump’s Administration we still don’t know what will happen with NAFTA. Contrast that with election day in the United States, when most polls showed a victory for Hillary Clinton, which would have meant no radical changes to NAFTA.
The uncertainty generated by Trump's victory and then inauguration as president led to a weaker peso and a slowdown in investments.
Thus, Mexico is now worse off than before the election, but is faring better than expected since there actually has been no concrete move to dismantle NAFTA.
However, that sense of relative alleviation may be based on wishful thinking. Sort of like the man who fell off the 20-th story of a building and as he passes the third floor he is still alive. Yet we know perfectly well how it will end.
As if the mixed signals weren’t enough, there is also uncertainty about the timeline for NAFTA talks.
Originally, Mexican officials expected Trump would notify Congress shortly after assuming office of his plans to renegotiate the trade pact. That didn’t happen.
Ross announced last month that he wanted to formally notify Congress of plans to start NAFTA talks before lawmakers went on their Easter recess this month. That didn’t happen and now Mexican officials believe talks will likely start in August and last six months – getting dangerously close to Mexico’s July 2018 presidential elections.
While the Trump Team may be in no rush to negotiate NAFTA, Mexican officials are trying to avoid a serious impact on their elections. One of the leading candidates is leftist Andres Manuel Lopez Obrador, a fierce NAFTA critic who has vowed to turn back energy reform, is feared by investors and has seen his popularity soar thanks to Trump. (See Mexico: Leftist Threatens Reforms).
THE CASE FOR NAFTA
Meanwhile, the fact is that Trump’s attacks on NAFTA are completely unjustified. The trade pact has benefited, not hurt, the United States, all leading experts say.
“NAFTA has made both the U.S. and Mexico more competitive and more productive through the opening of our markets and the increase of our interdependence,” former US Trade Representative Carla Hills wrote in Latinvex in 2012 on occasion of the 20-th anniversary of the signing of the pact. Hills led the US negotiations with Mexico and Canada.
"A trade war triggered by President Trump would be an act of pure economic aggression, unjustified either by the United States' economic and political interests or by Mexico's behavior,” Washington Post columnist Robert J Samuelsen wrote in February. “It would be the economic equivalent of Russia's seizure of the Crimea, a raw exercise in bullying."
He is, of course, absolutely right. Hurting NAFTA hurts both a valued client of US goods and services as well as US consumers. That is why a wide group of sectors – from agriculture to retail – have asked the US president not to change NAFTA.
Meanwhile, US consumers buying everything from cars to flat-screen TVs will see nasty price hikes as a result of any radical change of, or exit from, NAFTA.
The trade pact has been a driving force behind an improved US automotive sector, with companies like General Motors and Ford using economies of scale to produce cars or car parts in Mexico at lower rates than the United States.
Mexico is now the world's biggest exporter of flat-screen TVs, refrigerators and freezers, according to ProMexico. It has also become the fourth-largest PC exporter and sixth-largest household appliance exporter. Many of those items are purchased by US consumers at Wal-Mart, Target, Best Buy and other US retailers.
THE REAL STORY
Trump and some of his trade advisers appear obsessed by the US trade deficit with Mexico, seeing it as a sign of a loss to the United States. Last year it reached $63.2 billion.
However, that’s actually nearly six times smaller than the US deficit with China ($347 billion). It is also smaller than the US deficit with Germany ($64.9 billion).
The deficit is only the natural result of US consumers buying more from Mexico than US exporters sell to the country.
It may also be more meaningful to look at the ratio between US-Mexico exports and imports. For every dollar the United States spends on imports from Mexico, its southern neighbor buys 79 cents in US goods. That compares with only 25 cents cents from China and 43 cents from Germany.
In other words: Trade with Mexico is far more favorable for the United States than its trade with China and Germany.
Trump is now on good terms with the leaders of China and Germany and so he will likely not endanger trade with those countries. Yet, he continues to needlessly attack Mexico.
Meanwhile, if NAFTA is dismantled there is actually a chance that the US trade deficit with Mexico will widen, not decrease, as a recent analysis from Latinvex shows.
Last year, the US trade deficit grew 8 percent thanks to US exports to Mexico falling 11 times faster than Mexican exports to the United States.
Without NAFTA, there is a risk that tariffs on U.S. exports to Mexico could reach their bound rates, which average 35 percent. In contrast, U.S. bound rates average only 4 percent, the New York Federal Reserve said in a recent blog post.
NEXT 100 DAYS
We sincerely hope Trump’s next 100 days will see a clearer definition of where his administration stands on NAFTA.
We clearly favor a solution that entails minor changes to NAFTA – such as making the trade pact more modern and better for all three member countries – over any plans to exit NAFTA.
Mexican President Enrique Peña Nieto deserves praise for acting as an adult in dealing with Trump. He has not at any point lowered himself to the US president’s childish behavior and has instead followed a twin strategy of trying to keep an open dialogue with the Trump Administration aimed at salvaging NAFTA while aggressively looking at how Mexico can reduce its dependency on US trade by forging closer ties with other, alternative markets.
Now it’s time for Trump to act like an adult when it comes to Mexico.
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