The Trump administration is ramping up pressure on Congress to pass a rewritten version of the North American Free Trade Agreement (NAFTA) before the end of the year, but the new deal is likely promising more than it will actually deliver.
In a speech to conservative policymakers and members of Congress on Tuesday, Vice President Mike Pence argued that Congress should pass Trump's much-ballyhooed United States-Mexico-Canada Agreement (USMCA) because the new trade deal will boost the U.S. economy. Specifically, Pence singled out automakers as one of the big winners under the proposed trade deal, which still has to be ratified by all three nations before it takes effect.
Passage of the USMCA would "make sure there's more autoworkers' jobs for decades to come," Pence said Tuesday during an event hosted by the Heritage Foundation, a conservative think tank.
Pence has become the administration's primary cheerleader for the trade deal—both at public events like the one on Tuesday and others hosted over the past few months, and in private as the administration tries to sway members of Congress. Promising that the USMCA will create more auto-making jobs has been a central part of Pence's message. The White House has also been touting a more general figure, based on an analysis by the U.S. International Trade Commission (ITC), showing that passage of the USMCA will boost growth by 0.3 percent annually.
Provisions of the trade deal "will eliminate the historic incentive to move manufacturing jobs out of the United States of America," Pence said Tuesday, while promising that the USMCA "levels the playing field for American workers and American jobs."
But Pence is overselling what the USMCA would do. In fact, the new trade deal includes a handful of protectionist measures that will likely slow the U.S. economy in general and harm American automakers specifically. At the same time, the ITC analysis of the trade deal is likely overselling the potential benefits.
"On balance, the pact would hurt rather than help the U.S. economy," wrote Jeffrey J. Schott, a senior fellow at the Peterson Institute for International Economics, a pro-trade think tank.
Rather than boosting growth by 0.3 percent, the ITC analysis actually projects a 0.12 percent decline in growth, Schott argued, because it gives the USMCA credit for some developments—like new rules aimed at "reducing uncertainty in policies on data, e-commerce, and intellectual property rights"—that are already the de facto standard for trade between the three North American nations.
A separate analysis by the C.D. Howe Institute, a Canadian think tank, also concluded that the "negative elements of [USMCA] outweigh the positives and will result in lower real GDP and welfare for all three" countries involved in the deal.
Many of those "negative elements" have to do with new rules the USMCA would impose on automobile manufacturing across North America.
Beginning in 2020, when the USMCA is supposed to take effect, cars and trucks must have 75 percent of their component parts manufactured in North America in order to move across borders tariff-free. That's a significant increase from the 62.5 percent threshold required under NAFTA. Additionally, 40 percent of all component parts would have to be built by workers earning at least $16 an hour—effectively creating a continent-wide minimum wage that will discourage automakers from building cars in North America.
Both these "rules of origin" requirements and the new minimum wage mandates might undercut the Mexican auto industry, which is a key part of supply chains that crisscross both sides of the U.S.-Mexico border. The Mexican government estimates that about 30 percent of cars currently made there would not meet the new requirements.
Instead of complying with the new regulations to trade duty-free, it's likely that carmakers would simply pay the higher tariffs and pass those costs along to consumers. Indeed, even the Trump's administration's own ITC report says that consumer prices on cars in the U.S. would increase due to the USMCA—and that an estimated 140,000 fewer vehicles would be sold, while auto manufacturing jobs would decline by about 1,500.
If that's true, however, one might wonder why groups like the American Automotive Policy Council, an auto industry group, have voiced support for congressional approval of the USMCA.
The answer is that they are likely more worried about what could happen if the USMCA doesn't pass. Trump came into office promising to tear-up NAFTA, and passage of the USMCA seems like it might be the best way to avoid that worse-case scenario.
If the USMCA isn't as great as Pence makes it sound, it is at least better than the economic damage that would be done to all three North American countries if NAFTA were dissolved without a replacement. That's the unspoken part of the Trump administration's pitch for Congress to pass the USMCA: refusing to do so might court chaos.
"Auto companies opposed the USMCA auto provisions during the trade negotiations, though they accepted the final deal for fear that Trump would implement his oft-repeated threat to pull out of NAFTA," observed Schott. "And that's why Trump needs to raise U.S. tariffs to prevent increased car imports and why he is using the excuse of a threat to national security…to block foreign shipments to the U.S. market."
"Simply put," Schott concluded, "Trump needs to protect U.S. producers against the damage done by his own trade pact."