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The NAFTA agreement negotiations are cordial and conciliatory in tone- but that doesn't stop the Donald from playing a little hardball.

Mr. Trump has set a fire under the feet of his Nafta partners, who had been hoping for an exemption from the planned tariffs on steel and aluminum, by tying that to a deal.

“We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for the USA. Massive relocation of companies & jobs. Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed,” he tweeted on Monday. He also said Canada needed to “treat our farmers much better” and that “highly restrictive Mexico must do much more on stopping drugs from pouring into the US”.

What Trump is not saying here is that NAFTA is fundamentally flawed in its terms and this has allowed Canada and Mexico to drive such lopsided bargains with the United States in the past. How does this occur, that the 10th and 16th largest economies in the world can push bad deals on the country in the number one spot?

China.

You have no doubt deduced that China is not in NAFTA, and on paper that is true; but China is indeed a critical part of any NAFTA agreement because China trades heavily with Mexico and Canada and, by virtue of self-interest, Mexico and Canada pass on huge costs to the USA.

Because of the porous legislation included in NAFTA's genesis, any country that trades with Mexico or Canada is effectively in NAFTA. If a country has vast quantities of certain resources such as steel and aluminum, there is a huge incentive for them to circumvent US Tariffs by trading with other NAFTA members as an intermediary to the US market.

“México shouldn’t be included in steel & aluminum tariffs. It’s the wrong way to incentivize the creation of a new & modern #NAFTA,” ~ Ildefonso Guajardo, Mexico’s economy minister.

Mr. Guajardo is guaranteed to hold this position until forced to change as his country benefits hugely- not because of the tariff directly, but because his country is provided with a trade toll by other countries to access the NAFTA privileged terms. For example, in the NAFTA negotiations, Mexico and Canada are pushing for the smallest amount of North American parts in NAFTA automobile production. This means that Mexico and Canada can import the difference from China, Asia or Europe, finish the product with some basic assembly and then pass off the product to the American market- saving big money on tariffs for the original producing country in the process.

china-nafta

The Trump administration knows this, as Reuters reported in November.

"The Trump administration last month stunned its NAFTA partners by unveiling demands that half of the value content of all North American-built autos be produced in the United States and that the regional vehicle content requirement is sharply increased to 85 percent from the current 62.5 percent."

What this means by "regional vehicle content" is that currently 37.5% of vehicles produced under the NAFTA agreement can be made with non-NAFTA auto parts. That includes the total content of the vehicle- including steel, metals, plastics, and electronics. Mr. Trump wants to reduce this proportion to 15%, which is a protectionist and anti-Globalist move by any measure- forcing closed the gap in the legislation that has bankrolled the economies of Canada and Mexico for a generation.

By adopting this policy, the USA would prevent Canada and Mexico buying in Chinese auto parts to be assembled and shipped into the US market free of duties and tariffs. It makes great economic sense for Canada and Mexico to do this- the ports are busy, they have factories providing jobs doing the finishing assembly and so on. The Canadian and Mexican economies are thriving on this NAFTA loophole, at the expense of the United States.

This example of the NAFTA loophole extends to all products covered by the deal- even down to the food you eat. If NAFTA was a great deal for all parties, then Canada and Mexico would not be pushing for higher percentage points of foreign goods allowed in products produced under NAFTA. It just wouldn't make sense for them to do so if NAFTA protected the interests of primary producers in North America. If you are making applesauce and you can get apples shipped from Asia for 20% less than you can buy them from Francois in Quebec, what is a capitalist to do? Your hands are tied by the loophole that allows your competitors the same access to cheap foreign goods that you have- if you don't exploit the loophole, your applesauce may be too expensive in comparison. Even with the proven long-term flaws in globalized economies evident, you are unable to resist the cheaper raw materials available overseas.

"According to a 2010 Federal Reserve Bank of San Francisco report, approximately 35.6% of all clothing and shoes sold in the United States were actually manufactured in China, compared to just 3.4% made domestically." -Justin Kuepper, The Balance.

Under the current NAFTA agreement, Canada and Mexico are the gatekeepers for foreign goods to enter the United States through the back door. In this way, almost any trade in the US market is passing percentage points of profit to nations across the borders. That doesn't sound like a particularly free -or fair- trade agreement to me.


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Ash Sharp

by Ash Sharp

Editor.