Oct 1, 2018

Scholars Respond: New Trade Deal with Mexico, Canada

Christine McDaniel Senior Research Fellow, Daniel Griswold Director of Trade and Immigration

Christine McDaniel

Overall, this is good news for the region’s economy. Congress had made clear that a deal without Canada would be unlikely to pass, and in the end, all three countries came together to keep the deal. The announcement also helps to build back up some of the investor confidence that has been on the brink lately. 

While more analysis is needed, my early impression is that Canada and Mexico made more market access concessions than the US did, though Canada wisely ensured safeguards against future possible auto tariffs. 

Canada’s agreement to open its dairy market (albeit just a bit) was more than what was in their Trans-Pacific Partnership agreement. We will see how the e-commerce, data protections, digital trade, and de minimis threshold issues flesh out. These are key areas for the next phase of global trade talks.

The text appears to require each country to communicate with the others if they are initiating a free trade agreement with a nonmarket economy (e.g., China). This makes sense because we don’t have global or even regional rules on state-owned enterprises (SOEs) and subsidies yet (including arm’s length trade with SOEs and subsidized firms). 

The big negative here is the auto industry component, because forcing firms in one sector to pay higher wages is distortionary, and so are the more restrictive rules of origin. But if that was the worst of it, then it looks like we escaped catastrophe. 

Daniel Griswold

It does not seem as though much has changed from the original NAFTA, but the US (and the entire continent) dodged a bullet by avoiding a withdrawal from our existing trade agreement.

The best feature of the revised trade agreement with Canada and Mexico is that it leaves the successful NAFTA largely intact, including zero tariffs on virtually all goods. The unambiguous benefits include lower Canadian duties on dairy, better protections for digital trade, and a higher de minimis threshold for small packages exported from the United States. But the tighter rules of origin for motor vehicles made in North America will add to production costs, making cars and light trucks more expensive for US families and US vehicle exports less competitive in global markets.

The revised agreement is an “improvement” only if your goal is to reduce foreign barriers while keeping or increasing your own, or if you compare it to withdrawing entirely from NAFTA. The right measure should be whether an agreement enhances the freedom of Americans as consumers and producers to engage in mutually beneficial trade with people in other countries. Under that standard, the revised agreement is a mixed bag that will not have a major impact on the U.S. economy.

Photo credit: Evan Vucci/AP/Shutterstock

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