The American public and investors have been reasonably complacent about President Donald Trump’s approach to trade. The market surge following his election seemed based on the idea that he was serious about health care reform and a stimulative tax program, but not about his protectionist pledges. While efforts at health reform have failed and the administration’s tax plan faces long odds, this may be the week when his protectionism claims the stage.
Negotiators from the United States, Canada, and Mexico will reconvene this week near Washington, D.C., for the fourth round of talks to revise the North American Free Trade Agreement. These were the talks that launched after the President’s April dalliance with an executive order to kill the agreement.
Don’t be fooled by the nearly six-month-long quiescence. Much of that time was taken up by U.S. Congressional notification requirements, which did not allow talks to begin until mid-August. The first three rounds, held in each of the capital cities, were relatively innocuous. After some hostile opening remarks by the U.S. Trade Representative, Robert Lighthizer, the sessions have appeared reasonably calm, even constructive.
Appearances can deceive. It is common in trade negotiations to tackle straightforward issues first and turn to more contentious issues later. The Trump administration has been prolific in its criticism of NAFTA, but has made only the vaguest promises that it would strike a better deal. This left observers wondering how those promises would translate into actual negotiating text.
There was particular curiosity because some of the central tenets of the Trump approach to trade – in particular, the fixation with bilateral trade deficits – do not lend themselves to any obvious remedy through trade policy instruments. Further, time is of the essence. President Trump has clearly been impatient and Mexico sees a political imperative to conclude negotiations before its presidential election gets under way in the first half of 2018. Thus, observers awaited proposals intended to solve intractable problems in very short order.
This week U.S. negotiators intend to table proposals on all the controversial topics that embody the distinctive Trump approach to trade. The early signs are that it will be a train wreck. Key groups, such as the U.S. Chamber of Commerce, have felt compelled to “ring the alarm bells.” Chamber President Tom Donahue, in a speech in Mexico, said “There are several poison pill proposals … that could doom the entire deal.” These include measures such as a “sunset clause” that would terminate NAFTA after five years unless there was unanimous agreement that it should continue. Or new restrictive rules of origin, dictating which cars would qualify as ‘North American’ for tariff preferences.
The odd feature of these proposals is that they seem designed to please no one. A group of Mexican senators from the ruling party put forward some “red lines” that would prevent the Mexican senate from approving any NAFTA revision. The list included a sunset clause and restrictive rules of origin. Or, as the Chamber’s Donahue put it, “All of these proposals are unnecessary and unacceptable. They have been met with strong opposition from the business and agricultural communities, congressional trade leaders, the Canadian and Mexican governments, and even other U.S. agencies.”
Which raises the question – what is the Trump administration trying to achieve in these talks? What is the point of tabling proposals that would not win support from the U.S. Congress, much less from trading partners? After all, under the U.S. Constitution, it is Congress that sets trade policy. The executive branch can negotiate and sign a deal, but it has no effect until Congress passes it. So why put forward such provocative texts?
Two possibilities come to mind. First, after a campaign season full of outlandish promises, the administration could use the doomed submission of controversial language this week to tell supporters later that at least it tried. After the proposals face the inevitable backlash, the administration could retreat to a more workable stance.
A second, more likely explanation is that the President wants to kill NAFTA. A strong, negative reaction from Mexico and Canada this week could give him a pretext. The key evidence for this hypothesis is that the President keeps telling anyone who will listen that he wants to kill NAFTA. In an exclusive interview with Forbes this week, President Trump said, “I happen to think that NAFTA will have to be terminated if we're going to make it good. Otherwise, I believe you can't negotiate a good deal.”
If the President believes that termination would lead to a good deal, he is deceiving himself. As Donahue states, “If the administration issued a withdrawal order—which requires a six-month waiting period—it would not be viewed by our partners in Canada and Mexico as a negotiating tactic. Instead, it would abruptly slam the door on future negotiations because those governments have made it very clear they won’t negotiate with a gun to their head.”
To elaborate, the six-month waiting period would take us into the Mexican election season. Even if the Trump antics did not deliver a new, anti-American Mexican president in that election, the administration would end up with irate trading partners, an incensed American business community – and the exact same congressionally-mandated negotiating instructions it has right now. As to increased negotiating leverage, a snap back to pre-NAFTA tariff levels would mean the United States would apply an average 3% tariff on Mexico, while Mexico could apply an average 15% tariff on the United States.
Ever since Donald Trump joined the presidential campaign, there has been a tension between his trade rhetoric and reality. This could well be the week they collide. Brace for impact.
