Trump's new tariffs may blow up NAFTA

The NAFTA talks looked promising until last week, when Donald Trump exploded over the phone at Mexican President Enri...

Posted: Mar 2, 2018 10:54 AM
Updated: Mar 2, 2018 10:54 AM

The NAFTA talks looked promising until last week, when Donald Trump exploded over the phone at Mexican President Enrique Pe-a Nieto about the border wall. Both presidents stood firm on their positions; Pe-a Nieto said Mexico won't pay for the wall, while Trump insisted that it would, culminating in, as one Mexican official told the Washington Post, Trump losing his temper.

Then, along came the bombshell announcement on Thursday morning from the President that he was also going ahead with a massive 25% tariff on steel imports and a 10% tariff on aluminum imports. Aimed at China, it's actually going to hit our neighbor to the north particularly hard, for Canada is America's largest source of steel and steel products -- providing 16% of all imported steel -- followed by Brazil, and South Korea. China doesn't even make it into the top 10 of suppliers to the American market.

Despite the blowup between Trump and Pe-a Nieto, the nimble negotiators of a new North American Free Trade Agreement might still have been able to salvage a complete makeover of the 24-year-old pact. But Trump's sudden and utterly unanticipated steel and aluminum tariffs now make their task much harder.

Overriding many of the more sensible voices in his administration -- like Gary Cohn, his chief economic adviser -- the tariffs will only further poison an already thoroughly-polluted NAFTA well, potentially touching off a trade war if the injured parties decide to retaliate.

Of course, Trump could still impose these tariffs, while choosing to exempt certain countries -- like Canada and Mexico -- from the new tariff schedules. Indeed, he still hasn't signed the document, so he also has the option of choosing the smartest route and quietly scrapping the whole idea. Perhaps he might reconsider when he sees the damage his announcement did to the stock market -- the Dow plunging more than 400 points in the aftermath on Thursday. After all, he's spent a year taking credit for its outsize advance.

While the focus of the NAFTA negotiations has been on Mexico -- and the jobs Trump believes it's stolen from American workers -- the bigger victim of a NAFTA collapse could be Canada, which sends 75% of its total exports to the United States. An outright end to NAFTA would be potentially as catastrophic to Canada as Mexico. And an outright trade war with other nations, retaliating against American protectionism, would be catastrophic for all concerned.

Within hours of the Trump announcement, Canadian foreign minister Chrystia Freeland promptly issued her own warning of a looming trade war: "Should restrictions be imposed on Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interests and workers."

This week, the talks between Mexico, Canada and the United States resumed in Mexico City -- the seventh round of NAFTA negotiations that were supposed to have concluded successfully before Mexico heads into its presidential campaign on March 30. But, as of yet, fractious issues remain unresolved.

Even those most attached to NAFTA agree the pact needs to be updated. "When it was signed, Amazon was a rain forest in South America," Phyllis Yaffe, Canadian consul general in New York reminded me recently. A whole host of issues that have arisen between the three nations were never even imagined by the negotiators of the existing agreement.

At the top of the list is the issue of "rules of origin" particularly with respect to automobile manufacture and assembly. Trump wants a higher percentage of each automobile sold in the US to be made domestically -- as much as 85%, compared with 62.5% in the existing pact. Both Canada and Mexico believe this figure is too high. After all, a whole new network of supply chains has grown up in the past quarter century.

Then there's the proposed sunset provision -- that NAFTA would simply go away every five years if the deal is not renegotiated. Imagine the permanent bureaucracy you'd be creating if you knew you were going to have to revisit this treaty every five years, one Canadian official told me. Not to mention the inability of major corporations doing business in the three NAFTA nations to undertake any long-range planning. It can take longer than five years simply to create, design and tool up for a new car model.

At the same time, of course, Mexico has its own Gordian issues, many of them shared with Canada. These include digital trade, telecommunications, technical barriers, good regulatory practices, and sanitary measures against pests and pathogens on agricultural products.

With all these hurdles still ahead, negotiators may find little pressing need to speed up the timetable. A new Mexican president will be elected with a whole new parliament on July 1. Americans will go to the polls in November to elect a new Congress that could be substantially less inclined to press the kinds of NAFTA changes Trump has been demanding. That would all be a very wrong-headed timetable.

There are some tangible benefits to updating NAFTA now, and especially avoiding the steel and tariff increases that could touch off an even broader trade conflict. At stake is the entire economic growth plan that has been the centerpiece of the President's political appeal. A NAFTA redo is indeed long overdue, as well as a purge of the toxins of political correctness and ideological imperatives from all trade and tariff issues -- but, above all, a prevention of a potentially catastrophic trade war that could spread globally.

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