By Carlton Joseph
Since the 1990s the United States trade negotiators have been pushing “Free Trade,” including the removal of tariffs, government subsidies and other measures that will limit the role of government. The World Trade Organization (WTO) was established to deal with the regulation of trade in goods, services and intellectual property between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at reinforcing participants’ adherence to WTO agreements.
Since the election of President Trump, WTO members are being reminded that the US does not hold agreements sacrosanct, and that like her laws, everything is changeable, based on who controls Congress, the Supreme Court and the Presidency. In the current US environment, the Republicans control all the levers of power. So Trump understands that he can do whatever he wants, with whomever he wants and whenever he wants. In this environment, it is Trump and the Republicans against the world. Let’s hope the world wins.
Trump has decided that NAFTA was not in the best interest of the United States but instead of going to the WTO, he unilaterally imposed tariffs on Canadian steel and aluminum, saying that Canada is “very spoiled” and “very difficult to deal with” on trade. His Commerce Secretary, Wilbur Ross, publicly cited the slow NAFTA talks as the reason for slapping on the tariffs. He also placed tariffs on Mexican steel in an attempt to forcefully impose his worldview on the bilateral relationship rather than NAFTA. This bilateral view would effectively divide Canada and Mexico in order to take unfair advantage of the division.
Before we get into the trade details, let us review some economic theory that surrounds this issue. A trade deficit occurs when a country does not produce all it needs; it also results when domestic companies manufacture in foreign countries. When raw materials are shipped overseas to factories, they count as exports. When the finished goods are shipped back home, they count as imports. The imports are subtracted from the country’s Gross Domestic Product (GDP), despite the fact that earnings benefit the company’s stock price and the taxes increase the country’s revenue stream.
Another consideration is that a trade deficit is not necessarily a bad thing. It raises the standard of living and its residents have access to a wider variety of goods and services at more competitive prices. It also reduces the threat of inflation since it creates lower prices.
Remember, especially in the case of the US, it decided to sacrifice domestic production in order to purchase goods cheaply so that US citizens could enjoy a better standard of living. The strategy has backfired because the domestic companies started outsourcing the jobs to low wage countries, and the US began importing certain goods rather than buying domestically. The local companies then went out of business, specifically, because the domestic industry lost the expertise needed to remain competitive. Once out of business, the foreign companies had to hire more workers in order to keep up with the demand for their goods – for example, TVs, refrigerators, and clothing. The US consciously decided to leave the industries they created, believing that manufacturing offshore would maximize their profit.
The United States has the world’s largest trade deficit. The trade deficit in Goods with Canada is $18 billion and $71 billion with Mexico. However, we must be careful when looking at this deficit since it does not account for trade in Services where the US runs a surplus with these countries. The United States had a services trade surplus of an estimated $26 billion with Canada in 2017. The US exports $282 billion to Canada, more than it does to any other country, and it imports $300 billion. In addition, Canada is currently the US’ second largest goods trading partner and Mexico is it third largest.
Why is Trump so hostile with two of the US top goods trading partners, especially when previous US Administrations and Multinational companies voluntarily decided to use this economic strategy and felt that the country’s residents were feeling confident and wealthy enough to buy more than the country produced? The problem is that Trump has riled up his political base, and made economic promises that cannot be kept, based on the current economic order created by the US and its allies.
Trump showed his hand when he told reporters: “These are two very different countries, but I wouldn’t mind seeing a separate deal with Canada, where you have one type of product, so to speak, and a separate deal with Mexico. The US loses a lot of money with Canada and a fortune with Mexico.” His philosophy is to divide in order to conquer.
Based on my readings, Canadians seem to believe that Prime Minister Trudeau has done all in his power to accommodate and be “nice” to Trump. Remember, “nice” people in the business world finish last. Finance Minister Bill Morneau said that Canada’s response to possible tariffs by the U.S. will be “appropriate but firm,” adding that Canada is a key partner to the United States supply chain. Ontario Premier Kathleen Wynne, while campaigning, savaged the U.S. president as she called the tariff measure shortsighted and urged Trudeau “to take the strongest retaliation possible to protect our workers and industry.”
In the US, Speaker Ryan said the administration should not be targeting “America’s allies when we should be working with them to address the unfair trading practices of countries like China.” The Wall Street Journal describes it as a “looming fiasco” that could backfire on the president by alienating groups that should be his allies, like businesses and farmers who depend heavily on trade. His erratic, hostile behavior toward the US traditional allies is undermining Washington’s credibility around the world.
This is a state of economic warfare created by a President who does not understand how the global economy works and is too lazy to absorb new information that will assist him in decision-making. Trump is resurrecting demands to phase out Canada’s system of supply management for dairy, poultry and eggs. America’s proposal to scrap NAFTA’s Chapter 19, which provides a way to resolve disputes over anti-dumping and countervailing duties, recalls 1987, when the issue provoked a Canadian walkout from trade talks.
Another major contention has arisen over the automobile industry, responsible for more than a quarter of American imports from Mexico and Canada and, in Mexico’s case, all of the trade deficit in goods. At present, at least 62.5 per cent of a vehicle must be from within NAFTA members to qualify for tariff-free treatment. United States Trade Representative Robert Lighthizer wants that raised to 85 per cent, with an extra requirement of 50 per cent American content.
Trudeau said that killing the deal could be better than swallowing unfavorable revisions. Trump has said that he will agree to a fair deal, or there will be no deal at all. This sounds like a no deal result. The scenario makes me understand why Trump has declared several company bankruptcies. My way or the highway is not always the best approach, especially when you do not understand the global economic and political environment.
The US, Canada and Mexico trade more than a trillion dollars in goods annually. It signals that no country is safe. Mexico and Canada are the top two buyers of US exports. It is time that Canada and rest of the world realize that “trade is war” whereby nations seek to extract wealth from each other. This is war; Trudeau’s evoking the history of the two countries fighting together, from the beaches of Normandy to the mountains of Afghanistan has no consideration in this matter.
(Trinidad-born Carlton Joseph who lives in Washington DC, is a close observer of political developments in the United States.)