A new North-American trade deal is in the works between the U.S. and Canada, after a tentative agreement was reached with Mexico last week. The deal would replace the almost 25-year-old NAFTA accord between the three countries. The media and industry alike are suffering from “deal fever,” as they eagerly await the results of negotiations.
There is not much known about what this new deal will involve exactly. However, the few things we do know indicate there’s no need for any excitement. The new trade agreement will be simply an amalgamation of the old NAFTA, the previously-rejected TPP, and some new protectionist measures.
Is it likely to be a win for free trade? Not by a mile.
First, the agreement with Mexico specifies that two thirds of a car’s value (up from 62% in NAFTA) must be manufactured in North America, and almost half of it must be manufactured by workers earning a minimum of $16 per hour. Only the car manufacturers that meet these new requirements will be allowed to ship vehicles across the border at zero tariffs—others will pay a customs tax of 2.5%. This comes as great news for industrial unions in the U.S. and will be beneficial also for Canadian unions in the event of a deal. But Mexico also hopes that this will force auto makers to raise wages. However, these rules of origin and wage and content requirements only increase manufacturing costs. This may eventually reflect in higher car prices, and may bring about the relocation of auto industries from North America to lower cost jurisdictions in the long run.
Second, steel and aluminium imports are currently subject to tariffs after Trump’s latest policy attempts to rebuild U.S. metal industries. These restrictions are likely to remain in place in the form of a quota plan. The impacts of quotas and tariffs are similar, and will bring about price increases and losses for consumers and adjacent industries.
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