Economy, Finance and Markets

Trouble Ahead for Transatlantic Commerce

The USMCA and European Business

By Phil I. Levy

For a while there, it all looked so promising.

After a year of threatening trade war, U.S. President Donald Trump seemed to be turning to commercial peace. In late August he struck a deal with Mexico. By the end of September, he had added Canada. His administration released the text of the USMCA – the intended successor to NAFTA.

Not only did this seem to herald a more tranquil era in North America, but the Trump administration followed up the deal with significant steps toward advancing pacts with Europe and Japan. While there had been notional discussions of a U.S.-Europe deal after European Commission President Jean-Claude Juncker’s visit to Washington in late July, no serious negotiations could take place without notifying Congress. It was just such a notification the administration provided in mid-October.

A calm appeared to descend over all the trade turbulence.

Yet appearances can be deceiving. The USMCA is not a “done deal”; it does not provide a template for overcoming the Trump administration’s trade concerns; and there are serious indications of trouble ahead for transatlantic commerce.

The NAFTA-replacement deal was incomplete when it was released on the last day of September. All parties were rushing to meet a deadline, ostensibly related to requirements imposed by the U.S. congress. The parties said they wanted to sign before the current Mexican president left office on December 1, and U.S. law demanded the release of text 60 days in advance. It may not have been coincidental that this self-imposed deadline also required a deal to take place in time for the U.S. midterm election campaign, which ran throughout the month of October.

Both Canada and Mexico have made clear that they will be reluctant to sign the deal if the metals tariffs are not removed.

With the rushed approach, there were small matters that looked like they required further interpretation, such as the “de minimus” rule for exempting small shipments from tariffs. But much more significant was the omission of any agreement to remove U.S. tariffs on steel and aluminum, imposed on “national security” grounds in early June. Both Canada and Mexico have made clear that they will be reluctant to sign the deal if the metals tariffs are not removed. The Trump administration, meanwhile, has shown no inclination to do any such thing. In its one previous deal, with South Korea, it replaced metals tariffs with tight quotas.

Further, the Trump administration has not yet secured a majority in Congress to pass the new deal. That task became somewhat more difficult when the midterm elections of early November placed the opposition Democrats in charge of the lower chamber, where trade bill considerations begin. Democrats may very well be reluctant to hand President Trump a victory and, at the same time, sacrifice their long-standing campaign stance of blaming NAFTA for the ills afflicting organized labor in the United States.

The centerpieces of the new trade deal really only have a serious effect in the context of a broader auto trade war.

Even if the new deal were to pass Congress, it does not provide a new model for addressing the Trump administration’s objections to trade. In fact, the new deal does remarkably little, considering how vehemently President Trump denounced the original NAFTA. Its centerpiece is a modification to the “rules of origin” in the auto sector – the terms which decide whether cars qualify for the tariff preference or not. This change, which calls for both higher North American content and sets new demands for wages paid to auto workers, could prove costly for German auto makers who have invested heavily in Mexico, for example. It requires a certain fraction of costs to be undertaken by labor paid an average of $16 per hour – a requirement that is easily met in Canada or the United States, but well above going wages in Mexico. Yet these new requirements have an important caveat: they really only have a serious effect in the context of a broader auto trade war.

If a car does not qualify as North American, it faces the MFN auto tariff. At the moment, that is only 2.5 percent. Thus, faced with costly requirements to retool their supply chains, auto companies currently have the option of forgoing USMCA preferences and simply paying the tariff. At the current low tariff level, that’s the choice they would likely make. At a 25 percent tariff, potentially imposed through a new “national security” car case, the new requirements would start to bind.

There are a number of indications that the new auto tariffs may arrive before the EU even settles on a negotiating mandate.

Avoiding such a car war was President Juncker’s major motivation in promising a U.S.-EU trade deal. Yet there are a number of indications that the new auto tariffs may arrive before the EU even settles on a negotiating mandate.

President Trump has been consistent for decades in his disdain for international trade liberalization. The aberration was this fall’s peaceful interlude, not the bellicosity. That interlude served a purpose – it persuaded some U.S. voters that President Trump’s tariffs were a means to an end, rather than an end in themselves. With the conclusion of the elections, that need has now passed. Europeans should prepare themselves for more U.S. protection to come.

Phil Levy is a senior fellow on the global economy at the Chicago Council on Global Affairs and Adjunct Professor of Strategey at Northwestern University Kellogg School of Management.

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