Trump's new NAFTA and possible challenges for the UK post-Brexit

President Trump meets UK PM May

The New US-Mexico-Canada trade agreement, dubbed USMCA, was agreed late on October 2nd. It replaces the previous NAFTA deal that US President Donald Trump said was unfair on American workers.

The term ‘free trade deal’ is something of a misnomer. Actually, many of these deals are about agreeing on the sectors where countries can place restrictions on trade.

The new agreement between the three countries will have huge repercussions globally once it has been ratified by all of them. It is also a warning to the UK which is looking to sign their own agreements with these same countries after Brexit.

By renegotiating NAFTA, President Trump aimed to put “America First” and showed that size matters when it comes striking a good trade deal.

The US wanted Canadian agriculture markets to open up to American produce, keep the automobile supply chain American and institutionalise high car tariffs on the rest of the world.

They succeeded on all fronts. The threat of closing the US market to their Canadian and Mexican neighbours would decimate both economies.

But the agreement is also designed to scare Canada and Mexico into shunning trade talks with the Chinese. If either try to open trade negotiations with a “non-market economy”, the US can pull out of the USMCA.

The World Trade Organisation deems China a “non-market economy”. That means higher anti-dumping duties can be applied to its goods. The United States essentially now has a veto over some of the trade policies of Canada and Mexico.

In addition, the agreement includes a clause for tariffs of between 20-25 percent that would be introduced if the Canadians sell over 2.4 million cars a year into the US.

The target of this move is not Canada. They are currently nowhere near this threshold. But by referring to the tariffs in this trade deal, and making them the default position of Canada breaches its quota, it makes it legally clear that this will be the tariff for all other countries in the very near future.

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It can’t be any other way because if the US doesn’t introduce these tariffs, countries without a free trade deal with the US would have more beneficial trading terms (and a lower tariff currently around 10%) than their neighbours who have struck an agreement with Washington.

So that is not going to happen. US car tariffs are coming for everyone, including the UK & EU.

Worse still, especially for Europe, are the changes to rules of origin included in the new deal. This raises the amounts of parts in a car which need to be made within Canada, US or Mexico to 75 percent, up from 62.5 percent now. Any car with less than this amount of North American material will hit the 20-25 percent tariff.

This reduces the ability for the UK, (when it starts negotiating its trade deals with these countries) to get any benefit from a reduction in barriers in this area. If, for example, Canada has an agreement with the EU to scrap tariffs on car parts. But it won’t help EU-based suppliers, because if the Canadians put more than 25 percent of EU sourced parts in a car, they can’t export it to the US.

European carmakers, such as BMW and Mercedes-Benz, have factories in the United States that focus on high-end, high-volume models, such as SUVs. For example, BMW´s X5 uses just 35 percent of North American content, according to US Department of Transportation data.

To complete the triple whammy on the global car industry, the agreement also includes new labour provisions that mandate that by 2023 40 percent of vehicles sold into the US market must come from “high wage” factories that pay workers a minimum of 16 dollars an hour. That translates to a salary out of reach of most car workers in the world, including many in Europe.

The end result is that cars in North America will cost more and be less innovative, and the rest of the world is going to find it much harder to sell cars into the bloc. This is very worrying for European and British car manufacturers in particular. The United States is the number one export market for European cars, worth more than 37 billion euros a year.

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The Americans also managed to get the Canadians to open up more of their food market to US products, often blocked due to differing standards in the US, which the Canadians perceive to be inferior. There is also a forced a redesign of some of the Canadian agricultural support in the dairy industry which will be particularly challenging for the Canadians given both the climate and the type of farms prevalent there, and the fact that just one US state, Wisconsin, produces more milk that the whole of Canada.

So overall, this free trade deal is far from free trade, it imposes new barriers everywhere, both to the US’s partners in Canada and Mexico and to the rest of the world. It sends a clear message that all three countries are in the US trade sphere of influence and if you want to do a deal with them, you are going to need to follow US rules to get any benefit from it.

This will pose big questions for the UK. The car restrictions make a US-UK (or UK-Canada) trade deal far less attractive for the UK unless the UK can seek changes to the USMCA deal that would accommodate their specific concerns.

This would entail fully giving up on the EU rule and regulation system, which is still the biggest market for the UK by a long way. Accepting US rules on everything from food to cars, and giving up ideas of a trade deal with China would be a costly choice.

US presidents can serve a maximum of two four-year terms. So there is some hope that whoever enters the White House in the future might seek dismantle the far from subtle attempts to undermine the global trading system included in this agreement.

However, given the current trend in global politics, protectionism is becoming entrenched in the system. Free trade and free markets are out of fashion, so do not count on a United States U-turn anytime soon.