You can do a deal with China or the US but not bothby George Magnus / October 8, 2018 / Leave a comment
In spite of what had been a deterioration in relations between the US and both Canada and Mexico, all three countries signed a new agreement last week. Subject to ratification, it will replace the North American Free Trade Agreement (NAFTA), against which President Trump campaigned vociferously. Known by an unwieldy acronym, USMCA (US, Mexico, Canada Agreement) is not all that much more than a rebranding of NAFTA, and yet there is more to it than meets the eye, not least for Brexit Britain.
Looking simply at the trilateral agreement, it is a reminder that in trade negotiations size matters a lot. While many of the changes introduced into USMCA are cosmetic, there are new clauses relating to modern industries and intellectual property, and the US is a clear beneficiary of new arrangements stipulating rules of origin in the auto sector. Three quarters of the value of a car will have to be produced in North America in order for it to be imported duty-free. The US also gained in respect of access to Canada’s dairy market, and in several other areas, including investor dispute settlement rules. It also succeeded in establishing national security as a pretext for levying punitive tariffs, which it did earlier this year with respect to steel and aluminium.
Canada proved to be a feisty negotiator and was able to claim some headway, for example in retaining bi-national panels to adjudicate on decisions to impose duties and penalties, and Mexico, with whom the US reached agreement first, was insistent that Canada was party to the final agreement. The US, though, was the biggest and most powerful party and was able to secure most of what it wanted.
Ratification in Ottawa and Mexico City isn’t expected to be a problem, but it might prove trickier in Washington, especially if the composition of the Congress changes materially in the elections next month. There could be important procedural or even substantive differences between the White House and a more Democratic Congress over the withdrawal from NAFTA and approval of the USMCA.
Yet, the wider significance of the USMCA is rather less about technicalities, and altogether more interesting. It concerns two sets of relatively innocuous provisions in two of the last three chapters in the 34-chapter document, and is fundamentally about China, not trilateral trade per se.
The first set of provisions commits the signatories to normal and market-oriented practice when it comes to exchange rate management, as in the Articles of Agreement to which members of the International Monetary Fund have to sign up. The underlying objective is to outlaw, in effect, competitive devaluation as a means of obtaining (unfair) advantage in matters of trade and commerce.
It seems odd that this should form part of a US agreement with Canada and Mexico, neither of which the US has had a relevant dispute with in the past. Nor does one seem likely. Yet, the White House is ultra-sensitive to this kind of behaviour in the case of China and other Asian countries, some of whom it may try to create trade deals with in future. In any event, it serves notice that anyone who wants to do a free trade deal with the US might have to commit to a transparent and market-oriented exchange rate system, in effect drawing those countries into America’s rather than China’s financial orbit.
The second set of provisions sets out processes and procedures for withdrawing from USMCA if any one country decides to talk about, or later sign a free trade agreement with a “non-market economy”—a phrase which translates very obviously as China. In fact, there is a current dispute outstanding in the World Trade Organisation, lodged by Beijing, which appeals against the rejection by the US and EU of “market economy” status for China. This status makes a country less vulnerable to accusations of market-rigging and therefore to trade penalties.
The US is using tariffs as its first choice weapon in the trade war against China, but no one should imagine that the tension between the two countries will be limited in this way. Indeed, America’s strategy seems to be to strike trade agreements with like-minded countries, which together might make China’s economic life and the quest for new trade opportunities outside Asia more difficult. President Trump would not be perturbed if those like-minded countries became less of a conduit of Chinese goods into the US, and not worried at all if some China-centric supply chains were disrupted and re-formed outside China. The US may want to use the non-market economy language in the drafting of USMCA again if it seeks to negotiate trade arrangements with other countries.
That may be tougher with, say, the EU or Japan, but it might be more doable with the UK. After Brexit, and assuming that the British government is outside the customs union and free to strike new trade arrangements with other countries, Whitehall will be under great pressure to negotiate free trade deals with both the US and China—the other two major trading blocs aside from the EU. These USMCA provisions, if repeated, mean Britain would have to make a choice—to do a deal with the US or China, but not both. Someone needs to tell Liam Fox.
USMCA is not home and dry yet, and given that its raison d’être was Trump’s determination to terminate NAFTA, it doesn’t mean that there’s anything of great consequence to celebrate. Yet, nowadays we have to be grateful for small mercies. There is a trilateral free trade agreement in North America. The lobbying of politicians, businesses, America’s trade partners, and Trump’s own advisers didn’t fall entirely on deaf White House ears. And perhaps the White House is becoming more receptive to the idea that it’s not so smart to make enemies of your allies.