Trump & Trade – Happy Days?

The Mexico round of NAFTA talks is now finished. In the middle of discussions, Donald Trump used his executive powers to levy tariffs on steel and aluminum, but dialed them back against Canada and Mexico after getting a lot of negative reaction from his Administration: Gary Cohn resigned, both former Defense Secretary Jim Mattis and former Secretary of State Rex Tillerson spoke against the plan, and 107 Republican members of the House of Representatives sent the President a letter asking him to show more flexibility. Note that both members of the Administration who criticized the tariffs are no longer in the Administration.

All this drama distracted attention from the negotiations themselves, which terminated without any fanfare. It is interesting that Mr. Trump felt it useful to add the threat of punitive tariffs to the threat of terminating NAFTA as an incentive to Canada and Mexico to accede to the Administration’s demands. It is important to note that, while Canada and Mexico have been granted what would appear to have been a reluctant exemption, it is still explicitly tied to the Administration getting what it wants from the NAFTA negotiations.

The Globe & Mail, citing unnamed sources with knowledge of the talks, reported on March 21 that the U.S. negotiating team had dropped the requirement that all vehicles manufactured under NAFTA have at least 50% U.S. content. This development has not been confirmed by Chrystia Freeland. Perhaps this offer was just a pensée by Mr. Lighthizer and not a real offer. If Mr. Lighthizer is as reliable as his boss, it definitely needs to be in writing. And while the 50% US content rule is a big deal, there are many other deeply problematic demands by the United States in the automotive sector, including increased attention to the rules of origin and the treatment of raw materials from a non-NAFTA country that are then transformed into something useful in a NAFTA country. How is that to be addressed in the new rules of origin?

However, if the rumors are correct, there is a potential consensus emerging on auto manufacturing at talks now taking place in Washington. That leaves the following hot button issues:

1. periodic review of NAFTA;
2. Chapter 11, which deals with investors from one country suing the government of another country if they feel their business interests have been unfairly harmed;
3. Chapter 19, which is the dispute settlement mechanism for trade disputes within NAFTA; and
4. better access to Canadian protected markets (eggs and dairy).

My personal view is that if a sensible deal on the automotive sector can be reached, a successful outcome to these talks is somewhat more likely than it was. Perhaps the strong reaction to the proposed tariffs from within his country, Administration and party has given the President pause, although that seems unlikely since he has fired the two members of his Administration who raised the matter with him.

It seems more likely that it was never the intention to terminate NAFTA, only to make the other parties really nervous and get a better deal for America. It may be that Trump-the-showman wants a signature deal to tout to voters in the mid-term elections. He could achieve that with sufficient concessions, but it is hard to see how that would appeal to his base. There is nothing in Trump’s record that would suggest that he will suddenly become a willing and reasonably negotiator.

The Wall Street Journal sees all of this in the context of the larger trade debate between the United States and China. Their take is that the Administration realizes that it made a mistake in applying the steel and aluminum tariffs to everyone and is now busily making it clear to its friends (Canada, Mexico and the European Union) that they did not really mean it. The goal here is to build a cohesive group of trading partners to enforce stricter trade policies against China and, perhaps, Russia. The underlying logic is that you need friends to win a trade war.

That analysis suggests a level of planning and discipline that I find hard to attribute to this Administration. Its goal is to reset America’s trade relations with every country in the world on as close to a bilateral basis as possible, on the best terms possible. The negotiating style is to go in with all guns blazing, ask for much more than is necessary and then back off until they get to a point that is still better than their base case. Intense pressure to reach a deal is part of the strategy. This is not a friendly process: it will not build a coalition against China.

Despite our Prime Minister’s fond hope that the end is near, one concession from the United States will not get us there. The Lighthizer team started with ridiculous demands, and basically all of them have to come off the table, or be substantially altered, for something reasonable to happen. It is possible that Canada and Mexico can come to live with something less than that, and there will be a lot of political pressure to do so.

However, if Chrystia Freeland is in charge, I think these talks still have a long way to go. It may be that playing a waiting game will result in the institution of steel and aluminum tariffs but my view now is that the Trump Administration is not interested in the nuclear option of terminating NAFTA. So it has given itself a new tool, punitive tariffs, to keep the pressure on. Imposing a tariff on Canada and Mexico during the mid-terms would be popular with Trump’s base and with industry in some states that voted for him in the Presidential elections. It looks measured compared to terminating NAFTA. It is possible that Canada and Mexico will need to persevere if they want a decent deal.