President Trump is a proud America First protectionist. And yet, the poison pills he injected into the latest round of NAFTA negotiations will not only likely kill NAFTA — which he has derided as the "worst trade deal ever" — but also his own agenda of preserving American manufacturing jobs. Behold America's job killer in chief!
That the latest negotiations weren't going to be a kumbaya session was clear when, on their eve, Commerce Secretary Wilbur Ross penned an op-ed in The Washington Post arguing that the $70 billion trade deficit (the gap between the goods and services America exports to its trading partners and those it imports from them) between the U.S., Mexico, and Canada was costing more American jobs than ever before. He claimed that the percentage of U.S. content in manufactured goods coming to America from Mexico fell 10 points and Canada 6 points between 1995 and 2011. What was even worse, in his view, was that these non-American goods weren't even made in Mexico and Canada. Instead, our North American partners were getting them from other parts of the world, especially Asia. This meant that NAFTA was bleeding jobs not only from America, but from North America, defeating the entire purpose of the agreement which was "to advantage those within the agreement — not to help outsiders."
There are holes in Ross' zero-sum analysis big enough to drive several Mexican trucks through.
For starters, there is a fundamental mercantilist fallacy in his concern about trade deficits. He seems to think that these deficits are bad because they mean America is buying more from its partners than selling to them. However, the fact of the matter is that surplus dollars in the hands of foreigners ineluctably make their way back to America in the form of investments, stimulating the American economy and jobs.
But the bigger problem with Ross' argument is that he harps on the annual percentage drop in American-made parts in NAFTA imports while disregarding their rise in absolute terms. Thanks to the treaty, trade between the three countries has increased dramatically. For example, American imports from Mexico have increased from $40 billion to about $300 billion a year. So even if the percentage of American parts in these Mexican goods has decreased, in absolute terms it has increased from $10 billion to $46 billion. Ditto for Canada.
And of course, the Trump administration's flawed analysis leads to flawed remedies.
To keep jobs in America, Ross wants to tighten NAFTA's already stringent "rules of origin" requirements on imports. Currently, the treaty stipulates that 62 percent of the parts in imports, especially cars, must come from North America to avoid the 2.5 percent border tax that non-NAFTA countries must pay. This is among the toughest requirements anywhere. But the administration wants to raise that to a whopping 85 percent. On top of that, it wants 50 percent of the content to be not just North American but American.
This is a myopic demand that will backfire badly.
From the standpoint of maximizing economic efficiency, rules of origin are far from ideal because they force companies to source their components not from countries that offer the best prices, but from where they can get preferential tariff treatment. Still, at the time it was written, these requirements were not out of sync with the desire of manufacturers to integrate supply chains across North America and expand their regional manufacturing footprint. These rules offered them an additional incentive to do so and stay in the region. Indeed, post-NAFTA, not only did the Big Three automakers expand their U.S. operations, but Asian auto "transplants" also set up shop in America.
But since then, Chinese and other Asian suppliers have lowered the cost — and improved the quality — of their electronic and other intermediate goods used in cars and trucks. Hence, North American content in finished products is declining. Indeed, it is not just Mexican and Canadian manufacturers that are buying more components from China. American manufacturers are too.
Under these circumstances, if the Trump administration insists on tougher rules-of-origin requirements, it would prompt many companies to spurn NAFTA and pay the extra tariff in exchange for more sourcing flexibility. The Toyotas and Hondas of the world would have little reason to stay here, since they already have cross-border supply chains with other Asian countries such as Thailand offering them similar production efficiencies as in North America. From Trump's own standpoint of keeping jobs in America, this move would be totally counterproductive.
And if rule-of-origin demands don't prompt Mexico and Canada to quit NAFTA, other demands surely will.
NAFTA bans preferential treatment for domestic companies in government contracts in their home country. Trump wants to eliminate that ban as part of his "Buy American, Hire American" push, which would effectively mean that Canadian and Mexican companies would be shut out of doing business with Uncle Sam. This would raise the cost of infrastructure and procurement to American taxpayers.
American workers won't win either. Why? Because if America insists on such provisions, Mexico and Canada will have to retaliate in kind to appease their own domestic protectionists. That means American companies — and American workers — would lose out as work in Canada and Mexico dries up. Even the U.S. Chamber of Commerce has criticized this demand, along with the one calling for a sunset clause that would allow either country to pull out every five years if its trade deficit gets too out of whack with its partners'.
It is hard to accurately estimate the job losses from the collapse of NAFTA because so much depends on the replacement tariffs that would kick in. But take one example: America produces about 1 million more vehicles annually due to NAFTA. Some huge chunk of the 800,000 jobs in the auto industry would undoubtedly be jeopardized by killing NAFTA. The worst job losses, ironically, would be in states such as Michigan that helped deliver the White House to Trump.
Most people were afraid that when Trump lambasted NAFTA and promised to drive a hard bargain, he meant that he would use his clout to beat open our trading partners' protected industries (Canada still heavily shelters its dairy, poultry, and eggs from foreign competition, maintaining a 270 percent tariff on milk) without opening America's protected industries such as sugar and citrus. But he's gone way beyond that. It seems like he doesn't want a "better deal" for America. He wants no deal. He wants to build not just a physical wall but also a tariff wall.
The tragedy is that the more Trump tries to isolate America from the world, the louder will be the giant sucking sound of American jobs fleeing overseas.