One of the promises that won Donald Trump the US Presidential election was renegotiation or even abandoning of some of the treaties that were supposed to detrimental to Americans. He has a distinguished complaint against the North American Free Trade Agreement (NAFTA), which he called, “the worst trade deal ever made.”
To give the US President his due, he has been assiduously carrying out all his election promises, however crazy they may be. Talks to reconstitute the NAFTA have already begun and he has been trying to arm-twist Mexico and Canada, the other two partners, to agree to his terms.
What is NAFTA?
The US had originally signed a bilateral trade agreement with Canada, the US-Canada Free Trade Agreement, which was brought in to force in 1989. In 1991, the US began talks with Mexico, in which Canada joined, resulting in the North American Free Trade Agreement that was enforced from January 1, 1994. This agreement resulted in removing most of the tariffs between these three countries. All duties and restrictions on imports were gradually eliminated.
The NAFTA also deals with migration, customs procedures, government procurement, and investment, trade in services, protection of intellectual property rights, and dispute settlement procedures.
In May 2017, US Trade Representative Robert Lighthizer announced that the US intends to commence negotiations with Canada and Mexico with respect to the NAFTA. It was stated that the intention of the negotiations was to support higher-paying jobs in the US and to improve the terms of trade that US had with Canada and Mexico.
Why is NAFTA important?
Many experts are of the view that re-negotiating the NAFTA is unlikely to result in creating new jobs or result in better opportunities for US businesses. According to Business Roundtable, an association of CEOs of leading American companies, withdrawing from the NAFTA would reduce American companies’ global exports by 2.5 per cent, reduce purchasing power of American households by $654 per household due to higher prices and shift economic activity away from the US towards China, thus reducing GDP growth by 0.2 per cent. Agriculture, textiles and automobile companies in the US are expected to be impacted negatively if the tariffs and trade restrictions return.
Both Canada and Mexico appear ready to give a tough fight. Canadian Prime Minister Justin Trudeau has said that he would be ready to let NAFTA die altogether rather than accept certain hard-line demands.
The newly elected leader of Mexico, Andres Manuel Lopez Obrador, is also prepping for a blistery fight. He has stated that Mexico will not be a piñata (a container often made of papier-mache or pottery, filled with small toys or candy and then broken as part of a ceremony) and he will stand up to the POTUS to protect his country’s interest.
Here are some of the details in the agreement, which will change its name from NAFTA to the United States-Mexico-Canada Agreement (USMCA):
- Canada agreed to provide U.S. dairy farmers access to about 3.5 percent of its approximately $16 billion annual domestic dairy market, Canadian sources said, adding that the Canadian government is prepared to offer compensation to dairy farmers hurt by the deal.
- Under the agreement Canada has agreed to eliminate its Class 6 and Class 7 milk categories and associated pricing schedules for skim milk, skim milk proteins and other components and ultra-filtered milk, within 6 months after the USMCA goes into force.
- US farmers said those schedules had effectively pushed them out of the Canadian dairy market.
- The agreement will increase U.S. access to Canada’s dairy market beyond Trans-Pacific Partnership levels, a senior Trump administration official said.
- The deal will preserve a trade dispute settlement mechanism that Canada fought hard to maintain to protect its lumber industry and other sectors from U.S. anti-dumping tariffs.
- No substantial changes appear to have been made to the chapter 19 trade dispute settlement mechanism, nor the state-to-state dispute settlement.
- However, the agreement limits investor-state dispute settlement to preferential treatment cases and certain sectors dominated by state firms, such as energy and telecoms and infrastructure.
Autos side letter
- A side-letter to the agreement showed that Trump preserved the ability to impose threatened 25 percent global tariffs on autos while largely exempting passenger vehicles, pickup trucks and auto parts from Canada and Mexico.
- If Trump imposes so-called “Section 232” autos tariffs on national security grounds, Mexico and Canada would each get a tariff-free passenger vehicle quota of 2.6 million passenger vehicles exported to the United States annually, well above their current export levels.
- Pickup trucks built in both countries will be exempted entirely.
- Additionally, Mexico will get an auto parts quota of $108 billion annually, while Canada will get a parts quota of $32.4 billion annually in the event of U.S. autos tariffs.
Rules of origin for autos
- The deal set a 5-year transition period after the agreement enters into force for the regional value content requirement for autos to increase to 75 percent, from a current 62.5 percent. It requires 40 percent of vehicles value to be made in high wage areas paying $16 an hour, requiring significant automotive production in the United States and Canada.
- The pact also requires that vehicle manufacturers source at least 70 percent of their steel and aluminium from within the three countries.
- Reflecting the concerns of Mexico’s incoming government that the agreement would limit the country’s control over its oil resources, the deal states that Mexico has the direct, inalienable and imprescriptible ownership of all hydrocarbons in its subsoil.
- Despite the strongly worded language, the energy chapter does not prevent foreign oil companies from producing oil in Mexico under a liberalization of the industry passed by the outgoing government.
Why should Indians care?
Indian imports and exports will be impacted as the newer treaties re-align the demand-supply equations in various commodities. The less tolerant stance on immigration adopted by Trump and displayed in the Brexit referendum has consequences for the millions of Indians who aspire to study, work or settle outside India.
Re-thinking trade pacts that have promoted globalisation over the last half-century is something to get seriously worried about. If each country attempts to protect its businesses and adopts a tariff structure accordingly, then there will be chaos as countries with exportable surplus resort to dumping their products in other markets. This is likely to have an impact on global growth as well.
The United States and Canada forged a last-gasp deal on Sunday to salvage a three-country, $1.2 trillion open-trade zone agreement with Mexico that had been about to collapse after nearly a quarter century.
In January, the Trump administration declared tariffs on washing machines and solar panels—including those from India. Last month, the president invoked a little-used national security exception to justify 25% tariffs on steel and 10% on aluminium imports. India was included.
Two weeks back, Washington filed a complaint at the World Trade Organization (WTO)—the first WTO action of this administration—over several export subsidy programmes in India. These include the Merchandise Exports from India Scheme, the Export Oriented Units Scheme, the Electronics Hardware Technology Parks Scheme, Special Economic Zones, and the Export Promotion Capital Goods Scheme. Given these actions and an apparent trade war between the US and China, Indians will ask themselves “what’s next for India?”
Where does this leave India? In a world where trade success will be built not on rules, but, rather, on relationships, India has distinct advantages. Modi has devoted the past year to building a personal relationship with President Trump. His visit to Washington last year was a success, measured in hugs. There appears to be good chemistry between them, and Trump readily accepted an invitation to visit India.
Modi investing in personal relationships is a great strength for India. Indeed, the politics of the personal has been Modi’s style from the beginning. In the months to come, Modi and Trump will work to set the stage for the next step in our nations’ developing partnership. The test will come when President Trump asks Modi how he plans to reduce the $30 billion trade imbalance between the countries.
The world has benefited for 70 years from an international trading system based on rules and broad multilateral agreements. So have India and other developing countries, where hundreds of millions have been lifted out of poverty.
India has maintained good relations with Mexico. Government leaders of the two countries have met in both the countries on several occasions. A reflection of good relations is the growing India-Mexico trade. From the level of $251 million in 1999, the total trade between the two countries has now crossed $ 1.5-billion mark. Important sectors with strong Indian exports are engineering goods, chemicals and pharmaceuticals, gems and jewellery, and textiles. Mexican exports to India are dominated by crude and petrochemicals. According to the latest figures, investors of Indian origin have invested over $1.6 billion in over 67 business ventures in Mexico — the scenario dominated by LN Mittal group in steel and related sectors in Mexico. Besides, new joint ventures have recently been signed in pharmaceuticals and IT sectors.