A combination of the NAFTA “Fatal Flaw” & transnational Chinese shipments, was always at the heart of President Trump placing steel and aluminum tariffs on Canada and Mexico during negotiations that culminated in the USMCA trade agreement. The goal was to block China from dumping product into the U.S. through the doors of Canada/Mexico.
Within the USMCA President Trump and Robert Lighthizer placed a specific rule Article 32:10 which grants the U.S. the right to veto (control) Canadian and Mexican purchase agreements with “Non FTA Market Countries”, ie. China.
This Article 32:10 rule is at the core of the USMCA agreement. However, after the USMCA agreement was reached President Trump kept the Steel/Aluminum tariffs in place. For those who don’t understand Trump (insert Chrystia Freeland here) the question was always: why?
Quite simply the answer behind the question was President Trump’s retention of leverage. Yes, in 2018 the USMCA was agreed to; however, the USMCA was not ratified by either Canada or Mexico…. it was only an agreement. Why would Trump remove critical leverage on an initial promise.
Trump is not a politician; he’s a businessman who knows promises are paper until they become action. Additionally, President Trump is a tactician; the tariff leverage was held until such a time as removing it would generate an immediate gain in national compliance toward his trade objective… That’s the action. Today:
(Bloomberg) President Donald Trump said the U.S. will lift steel and aluminum tariffs on Canada and Mexico, boosting efforts to encourage lawmakers to ratify a new North American trade deal.
“I’m pleased to announce that we’ve just reached an agreement with Canada and Mexico and will be selling our product into those countries without the imposition of tariffs or major tariffs,” Trump said at an event Friday. “Hopefully Congress will approve the USMCA quickly.”
In a joint statement Friday, Canada said it will lift retaliatory duties on U.S. products as part of the deal, which will take effect within two days. Mexican Deputy Foreign Minister Jesus Seade, in a Twitter post, welcomed Trump’s removal of the duties. Both nations suggested it would open the way for their lawmakers to approve the new trade pact.
The move will lift the 25% steel and 10% aluminum tariffs the U.S. placed on the two trading neighbors almost a year ago in the name of national security. The decision sparked tit-for-tat duties from Canada and Mexico on U.S. farming goods and other products, and became an obstacle for lawmakers in all three nations to ratifying the U.S.-Mexico-Canada Agreement.
As part of the agreement, the U.S. will be able to re-impose the tariffs on metals imports if not enough is done to prevent any surge of metals imports beyond historical levels. The nations have also agreed to ramp up efforts to trace where the metals have come from originally, to stop the diversion of shipments from other nations to dodge tariffs.
The enforcement system will aim to advantage primary steel and aluminum producers in the three-nation trading bloc to ensure that the metal is melted, poured or smelted regionally. (read more)
President Trump is strategic. The timing is perfect as the U.S. has shown the world the administration’s response to China is unrelenting. As a result of Beijing failing to uphold their end of the prior agreement between Vice-Premier Liu He and USTR Robert Lighthizer, the negotiations with China have stopped.
The consequence of China failing to reach a free, fair and reciprocal trade agreement with the U.S., with strong enforcement mechanisms, means that China remains a “non market-based economy”. Tariffs against China now increase, and both Canada and Mexico are specifically accountable under the USMCA to retain the U.S. market position toward Chinese goods.
In essence, if Mexico or Canada violates USMCA Article 32:10, they will suffer similar consequences as currently visible toward China. The U.S. will enforce all the regulatory and compliance verification to ensure that Canada and Mexico do not engage in transnational shipments of Chinese products. That is the “enforcement system” that both nations will adhere to enjoy the benefits of steel/aluminum tariff removal.
According to the Canadian statement, the US and Canada will "implement effective measures to prevent the importation of aluminum and steel that is unfairly subsidized and/or sold at dumped prices."
— Mark Knoller (@markknoller) May 17, 2019
The resulting trade dynamic, an inherent lopsided benefit to the U.S, is genuinely brilliant as executed by Trump’s team. Notice who wins.
President Trump and Secretary Wilbur Ross created the tariffs out of thin air. Yes, they simply created killer trade leverage… Now, two years later, in exchange, for removing a punishing trade restriction that (A) previously didn’t exist; and (B) was crushing both economies; Canada and Mexico remove all countervailing duties which further opens their markets to U.S. goods…. and, simultaneously, agree to the terms which were at the core of the original demands, intents and purposes of President Trump.
USTR Washington, DC –Today, the United States announced an agreement with Canada and Mexico to remove the Section 232 tariffs for steel and aluminum imports from those countries and for the removal of all retaliatory tariffs imposed on American goods by those countries. The agreement provides for aggressive monitoring and a mechanism to prevent surges in imports of steel and aluminum.
If surges in imports of specific steel and aluminum products occur, the United States may re-impose Section 232 tariffs on those products. Any retaliation by Canada and Mexico would then be limited to steel and aluminum products.
This agreement is great news for American farmers that have been subject to retaliatory tariffs from Canada and Mexico. At the same time, the Agreement will continue to protect America’s steel and aluminum industries. (USTR)
Canada and Mexico can no longer broker themselves as back-doors to the U.S. market; and at any given time, if either nation flinches, a future administration can pull out Article 32:10, enforcement entirely in the control of the United States, and POOF insta-leverage.
Don’t forget President Trump’s entire purpose for eliminating NAFTA was to stop Canada and Mexico from exploiting their access to the U.S. market at our expense. Initially both nations said they would never agree to terms that undercut their independent abilities. Here we are two years later, and they have agreed to the exact terms that underlined the original foundation of Trump’s position.
President Trump, Secretary Ross and Ambassador Lighthizer took the entire North American business community on a scenic two-year tour deep inside the land of leverage.
Greatest economic President in modern history.
A businessman.
A Titan.
…”Complicated business folks, …complicated business”….