Important stuff in this ‘straight talk’ interview. Buckets of ‘breaking’ stuff to unpack.
First, per Trade Adviser Peter Navarro, the Steel and Aluminum tariffs will be announced tomorrow. Second, Mexico and Canada will be given an exemption from those tariffs while NAFTA is being renegotiated. WATCH:
The exemption will give U.S. Trade Representative Robert Lighthizer increased leverage in his efforts to close the NAFTA loophole. Closing the NAFTA “fatal flaw” is the essential “Option 1” that we have discussed previously several times. It would be against the interests of Canada and Mexico to ever agree to close the loophole. However, the steel and aluminum tariffs add a bit of financial incentive not previously in the equation.
It is still highly doubtful the amount of money in the steel and aluminum tariff aspect is close to enough to get Canada and Mexico to agree to close the backdoor loophole. However, any amount is more than was there before…. so the possibility of “option 1” increases a smidge.
THE LOOPHOLE – NAFTA’s FATAL FLAW: Why deal with the U.S. when you can just deal with Mexico, and use NAFTA rules to ship your product directly into the U.S. market?
This exploitative approach, a backdoor to the U.S. market, was the primary reason for massive foreign investment in Canada and Mexico; it was also the primary reason why candidate Donald Trump, now President Donald Trump, wanted to shut down that loophole and renegotiate NAFTA.
This loophole was the primary reason for U.S. manufacturers to relocate operations to Mexico. Corporations within the U.S. Auto-Sector could enhance profits by building in Mexico or Canada using parts imported from Asia/China. The labor factor was not as big a part of the overall cost consideration as cheaper parts and imported raw materials.
If you understand the reason why U.S. companies benefited from those moves, you can begin to understand if the U.S. was going to remain inside NAFTA President Trump would have remained engaged in TPP.
As soon as President Trump withdrew from TPP the problem with the Canada and Mexico loophole grew. All corporations from TPP nations would now have an option to exploit the same NAFTA loophole.
Why ship directly to the U.S., or manufacturer inside the U.S., when you could just assemble in Mexico and Canada and use NAFTA to bring your products to the ultimate goal, the massive U.S. market?
From the POTUS Trump position, NAFTA always came down to two options:
Option #1 – renegotiate the NAFTA trade agreement to eliminate the loopholes. That would require Canada and Mexico to agree to very specific rules put into the agreement by the U.S. that would remove the ability of third-party nations to exploit the current trade loophole. Essentially the U.S. rules would be structured around removing any profit motive with regard to building in Canada or Mexico and shipping into the U.S.
Canada and Mexico would have to agree to those rules; the goal of the rules would be to stop third-party nations from exploiting NAFTA. The problem in this option is the exploitation of NAFTA currently benefits Canada and Mexico. It is against their interests to remove it. Knowing it was against their interests President Trump never thought it was likely Canada or Mexico would ever agree. But he was willing to explore and find out.
Option #2 – Exit NAFTA. And subsequently deal with Canada and Mexico individually with structured trade agreements about their imports. Canada and Mexico could do as they please, but each U.S. bi-lateral trade agreement would be written with language removing the aforementioned cost-benefit-analysis to third-party countries (same as in option #1.)
All nuanced trade-sector issues put aside, the larger issue is always how third-party nations will seek to gain access to the U.S. market through Canada and Mexico. [It is the NAFTA exploitation loophole which has severely damaged the U.S. manufacturing base.]
Additionally, with Canada now joining TPP it has become impossible for the U.S. to remain in NAFTA and simultaneously conduct trade negotiations with TPP nations.
EXAMPLE: If the U.S. remained in NAFTA all TPP nations would engage in trade discussion knowing there was a Canadian and/or Mexican option to gain access to the U.S. market. Therefore, despite the size of our market, we could never negotiate a better trade agreement than the deal existing between Canada, Mexico and their TPP partner nations.
President Trump, Commerce Secretary Wilbur Ross, White House Trade Adviser Peter Navarro and U.S. Trade Representative Robert Lighthizer well understand this structural problem. ONLY Trump, Ross, Mnuchin and Lighthizer are willing to confront this problem. If Trump had lost the election, Clinton would have joined the multinationals and U.S. workers would have suffered greatly.
Tthe issue of Canada and Mexico making trade agreements with other nations (especially China), while brokering/leveraging their NAFTA position with the U.S. as a strategic part of those agreements, is a serious issue that cannot adequately be resolved while the U.S. remains connected to NAFTA.
At the conclusion of Round #6, this was the direct issue at the heart of a very frustrated U.S.T.R. Lighthizer’s strongly worded response to Canada:
[…] In another proposal, Canada reserved the right to treat the United States and Mexico even worse than other countries if they enter into future agreements. Those other countries may, in fact, even include China, if there is an agreement between China and [Canada]. This proposal, I think if the United States had made it, would be dubbed a “poison pill.” We did not make it, though. Obviously, this is unacceptable to us, and my guess is it is to the Mexican side also. (read full remarks)
Lastly, don’t forget we still have two big trade options that can easily replace any trade issues with Canada and Mexico. ♦First, the U.K. is exiting the European Union. Brexit provides an opportunity for team Trump to negotiate both enhanced exports and replacement imports. Second, Trump has favorably positioned a very strong U.S. relationship with India (PM Modi), and T-Rex has expanded the Indo-Pacific region to complement diplomatic interests with MAGAnomics.
We could drop half our favorable trade deals with Canada and Mexico and easily make them up with new trade deals with the U.K. and India. This reality is part of the dynamic POTUS Trump has been positioning as a counter-weight to an economic and geopolitical confrontation with China. All of those trade seeds have the potential to deliver a replacement harvest.