Why Trump’s NAFTA Strategy Is a Surefire Failure

usa-trade-mexico-nafta_1.jpg

August 18, 2017

Long-awaited talks to renegotiate the North American Free Trade Agreement began in Washington Wednesday. And it doesn’t look good for President Trump and Robert Lighthizer, his special trade representative and leader of the U.S. delegation facing Mexican and Canadian officials.

This is Trump’s moment of truth on trade, one of his premier issues. But even before Lighthizer sat down at the table, it was almost certain “America First” and “Made in America” will remain empty promises when the NAFTA talks end in January.

Related: Why Renegotiating NAFTA Won't Be as Easy as Trump Says

One obvious reason: Mexico and Canada have a lot at stake, too, both politically and economically. Mexican President Enrique Peña Nieto faces an election next summer. Justin Trudeau has to bring something back to Canada for restive industrial lobbies, greens, and other interest groups. Everyone goes home a winner is the name of this game. And nobody can win much of consequence unless there is a loser on the other end.

The 1994 pact could use an update. Chrystia Freeland, Trudeau’s foreign minister, is looking for a “modernized NAFTA” come January, and all sides are in for this. This means topics such as rules of origin, local content, e-commerce technology, and emerging products such as batteries that drive electric cars will be on the table this fall. The new NAFTA will have new sections, but it won’t in any way be a radically new path forward.

Trump promised too much, and nobody in his administration — not Lighthizer, not Wilbur Ross at Commerce — has yanked him into reality. They all seem to be going at the trade question with bad strategy and very misguided tactics.

Related: As NAFTA Talks Begin, Trump's 'America First' Agenda Looms Large

Trade War Time Warp

On the strategy side, Team Trump’s a little lost in the past: Their working assumptions are outdated. Borders can no longer dictate production—a simple reality in a globalized industrial environment. This is what some U.S. industrial lobbies—autos chief among them—are trying to make clear.

Columns of trade figures are no longer straight-line indicators of what’s going on in a nation’s industrial base. The approach fails to account for vast, complex supply chains and other features of transnational manufacturing.  

Trump has made trade deficits with Mexico and Canada the bull’s eye he’s aiming at, but he’s practically predestined to miss. Political gestures won’t override economics, and there’s little to gain on the deficit side in any case.

Strip out autos, and the U.S. is in surplus with Mexico. Delete energy products and it’s the same with Canada. “I don’t see how you can address the deficit in NAFTA,” a Mexican official said the other day. Factor in component sourcing practices, assembly platforms, and other perfectly ordinary realities, and he’s right.

Related: Opposed From the Start, the Rocky History of NAFTA

There is one piece of bacon waiting for Lighthizer if he’s skilled enough to get it. Wage rates are another item needing adjustment, especially in Mexico’s case: They have to go up to put NAFTA signatories on a leveler field. The Mexicans agreed to this during the TPP talks, and they can agree to it again.

Trump has done a poor job on his tactical stance, too. Bullying Peña about the famous Wall and carrying on about Mexican rapists now go from bad ideas and crude campaign tricks to mistakes that position the U.S. badly.

We can’t forget Trump’s idea last week to intervene militarily in Venezuela: The Mexicans won’t. Latin Americans are no longer on for the “America’s backyard” junk, and Lighthizer will hear it in their voices.

But Lighthizer so far doesn’t seem to see the mistake here. He opened up the proceedings Wednesday with both guns blazing, lecturing counterparts on the pact as one great big failure. Canadians and Mexicans made no secret they were irked.  

Related: Factbox: Key issues in the NAFTA Renegotiations

Donald Trump just doesn’t have a good trade game. In the NAFTA case, he’s treating longtime allies and cooperative neighbors as adversaries, but the same holds true for China, the Germans, and everyone else. There’s no upside in Trump’s way at it. If you want to cram more into a real estate contract, maybe the bare-knuckle snarl works. But Manhattan real estate deals and trade diplomacy are not the same things.

What Team Trump needs to do to get the trade position right is not that hard to understand. Strengthening the U.S. industrial base is the right objective. But you do this with policies that push industry and the work force up the technology and skill ladders exactly as the Japanese have, especially since the 1980s.

The Japanese survived the swift rise of the Koreans, Singaporeans, and now the Chinese. That’s no mean accomplishment given Japan’s cost structure.

How’d they do it? Automation and training with full-tilt policies behind them, simple as that. Why were the Japanese out front on, say, robotics? No need to ask, only to take the lessons.

TOP READS FROM THE FISCAL TIMES