Showing posts with label Nafta. Show all posts
Showing posts with label Nafta. Show all posts

Sunday, March 31, 2019

30/3/19: The Art of Trade Fudge: USMCA


Much-lauded Trump's Nafta 2.0, officially known as the United States – Mexico – Canada Agreement (USMCA) came to being on November 30, 2018. In his State of the Union speech on February 5, 2019, President Donald Trump claimed that the USMCA will replace “the catastrophe known as NAFTA” and “deliver for American workers like they have not had delivered to for a long time.” In a brief summary of the USMCA, Vox (see https://www.vox.com/2018/10/3/17930092/usmca-nafta-trump-trade-deal-explained) has effectively argued that the new Agreement is largely a rehashing of the original Nafta - a step in no new direction, with only minor modifications of the Trump-hated agreement.

Last week, the IMF piped in with its own analysis of the Agreement. The new IMF paper (see: https://www.imf.org/en/Publications/WP/Issues/2019/03/26/NAFTA-to-USMCA-What-is-Gained-46680) provides "an analytical assessment of five key provisions in the new agreement, including:

  • tighter rules of origin in the automotive, textiles and apparel sectors, 
  • more liberalized agricultural trade, and 
  • other trade facilitation measures." 
So how good is the USMCA in driving forward trade and investment flows between the three economies? Per IMF, the "results show that together these provisions would adversely affect trade in the automotive, textiles and apparel sectors, while generating modest aggregate gains in terms of welfare, mostly driven by improved goods market access, with a negligible effect on real GDP. The welfare benefits from USMCA would be greatly enhanced with the elimination of U.S. tariffs on steel and aluminum imports from Canada and Mexico and the elimination of the Canadian and Mexican import surtaxes imposed after the U.S. tariffs were put in place."

So, repealing the problem created by Mr. Trump - steel and aluminum tariffs - has more potential for welfare gains for Mr. Trump's electorate, than the new Nafta agreement that Mr. Trump claims to be one of his Administration's major achievements.

Mr. Trump has referenced, on many occasions, the need for reducing U.S. trade deficits with Mexico and Canada as the core justification for altering Nafta. IMF analysis of the USMCA shows that under the most welfare-enhancing scenario of USMCA introduction, accompanied by normalization of trade in steel and aluminum, U.S. trade deficit with Mexico can be expected to improve by only USD576 million per annum (0.58%), and with Canada by USD 1,781 million (4.31% improvement). However, U.S. trade balance with the rest of the world is expected to worsen by USD 2,698 million (a deterioration of 0.375%), more than offsetting the gains from Canada and Mexico trade.

Worse, U.S. workers will see no material gains from USMCA, as the IMF estimates presented in Table 9 (below) show:

As noted above, IMF projects no material growth boost from USMCA. More detailed analysis - by sector - shows that under the scenario involving repeal of Trump tariffs (the only scenario with positive welfare impact of USMCA), only two non-agricultural sectors of the U.S. economy can expect gains in output: food manufacturing and Other Manufacturing. In contrast, six sectors are likely to see their output decline:


All in, the IMF research shows the extent of economic fudge that is the current Administration's trade and investment policy. The art of the deal seems to be the art of faking soundbites and slogans, while delivering nothing new.