A New Relief Naphtha
A New Relief Naphtha
Canada joined the US UU And Mexico on Monday in a revised trade agreement to replace the North American Free Trade Agreement, and the shares recovered in relief. The main virtue of the new agreement is that it keeps one of Donald Trump's main protectionists, even if the new NAFTA is worse for trade and economic growth than the status quo.
Oh, and please do not call it Naphtha 2.0. Mr. Trump calls it the United States-Mexico-Canada Agreement to show that he has fulfilled one of his main campaign promises. And in that sense, we are happy to avoid the great damage that would have caused a unilateral withdrawal from the United States.
But the new agreement is more of a relief than a vindication, as the nearby chart shows. Stocks are only reaching their height since January, before Mr. Trump began to choose commercial fights around the world. Markets have fallen and gone up in the last nine months, partly because of how bad Trump looked like to trade. They began to increase more consistently after Trump declared a truce with Europe and ordered his trade negotiators to end Nafta.
The inclusion of Canada is especially crucial, and the last minute commitment is a step forward. The big gain for farmers in the United States is that Canada agreed to eliminate its quota and price system for certain dairy products, although the overall share of the United States' share of the Canadian dairy market will increase by less than one percentage point. . Canadian exports of dairy products could face a new tax to discourage its producers from setting their export prices below market prices.
In return, the Trump Administration wisely agreed to preserve the dispute resolution mechanisms of Chapters 19 and 20 of NAFTA. The new text retains the right to challenge the anti-dumping and countervailing duties imposed by the neighbors. Panels to resolve disputes from state to state also survived. This is vital for Canada to avoid the many protectionist pressure groups in the United States that use other US laws to punish competition from imports, such as timber.
The trilateral text also incorporates most of the details of the pact between EE. UU And Mexico reached in August, and much of this is an important modernization based on new economic realities. This includes chapters on digital commerce, financial services and intellectual property, as well as important clarifications on investment rules for telecommunications and energy in Mexico.
The agreement prohibits discrimination against genetically modified crops, and data protection for biological medicines will double to 10 years. The free operators also defeated Trump's demand to automatically close the agreement every five years. The commitment to extend the pact for 16 years, with a review period every six years, still adds unnecessary uncertainty, but is probably not fatal to new investments.
That more or less exhausted the good news. The new agreement eliminates protections against abusive government behavior for most foreign investors. In Mexico, only oil and gas, electricity, telecommunications, transportation and public works will have access to multilateral dispute panels. The rest will have to go through local courts unless their property is confiscated directly. This is worse than the status quo.
The new agreement also takes a giant step towards politically administered trade by imposing new rules of origin and labor regulations. Passenger vehicles will no longer enjoy duty-free access across borders unless they meet the highest content requirements in North America, both in finished products and in parts. This will add costs and complexity to the construction of automobiles in the continent and will make final products less competitive throughout the world.
Worse yet, the agreement opens the door to the use of trade agreements to dictate a minimum wage and a labor policy in Mexico. Automotive companies in Mexico will have to pay well above market wages at 40% of their production to qualify for duty-free treatment. Ford and GM have resigned themselves to this and may be able to perfect it, but some people we respect think that the net result will drive car production to the margin of North America.
Mexico and Canada also bought some insurances against possible "national security" tariffs from Section 232 of the United States on autos. Mexico will be able to export to the US 2.6 million cars tax-free if those tariffs are imposed. After exporting 1.7 million passenger vehicles last year, Mexico has room to grow. But if the rate is punitive, the new rule will act as a cap. By the way, Trump's punitive tariffs of 25% on steel and 10% on imports of aluminum remain in effect for Canada despite the new agreement.
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If this can be approved, Congress will have to wait for a careful reading of the fine print. This year's passage could be possible if Mr. Trump is willing to give up the protection of the commercial promotion authority of a simple majority of votes in the Senate. The vote is more likely to take place next year when the Democrats can control the Congress.
Trade Representative Robert Lighthizer has been saying that Mr. Trump has persuaded the Democrats by co-opting Big Labor with the new salaries and union mandates. But keep in mind that even the United Auto Workers said Monday they are holding the trial. Only a handful of House Democrats voted to grant Barack Obama commercial promotion authority. Would Nancy Pelosi really give a political commercial victory to Mr. Trump?
Meanwhile, it is likely that the business of the United States is ambivalent with respect to a pact that is worse than Nafta. Free trade GOP will also prefer the status quo, and Republicans always provide most of the votes for trade agreements. The new trade agreement could have been worse given Mr. Trump's protectionist beliefs, but that is the best we can say about it.
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