Trump, Trade, and Train Wrecks

I have noted in a few posts over the past year and a half how frustrating it is to try and follow the chaos and incompetence that is the Trump Administration. Apart from being completely exhausted (and exasperated) by nearly everything, it hasn't gotten any easier to see anything resembling coherence or a grand plan.

Competence Need Not Apply

Just after Trump's election in November 2016, I'd have to characterize my outlook as a kind of hopeful resignation. I was resigned to the fact that nativist populism had carried the day and that Trump had put forward too many policy positions on the campaign trail I simply couldn't support. However, I was hopeful that there would at least be a modicum of competence in their implementation. "Perhaps I'm wrong," I thought. "Perhaps those who voted for Trump saw something in his messaging I was missing?" "Perhaps voters in the UK had seen something similar months earlier when they narrowly voted to exit the European Union?" I was well aware that there were voters out there, under pressure economically, anxious about their status in the global economy, and disgusted by the evident ineptitude of our political leadership to do anything about it.


The only real surprise was the willingness of voters in both cases to back positions on things that would so obviously make them poorer. Anger and frustration with the uneven distribution of the gains from globalization, perhaps understandably, led voters to cast their lot with something different,.... radically different. However, I was particularly stunned by the willingness of so many Americans to seek something different via an odious figure like Trump. Fine!

My glimmer of optimism came, believe it or not, from Trump himself. He had no experience in politics, government, or leadership in a public domain. And, apart from periodic bombastic pontificating in the New York tabloid press, Trump had no discernible interest in, or knowledge of, public policy. But, hey, as he said repeatedly on the campaign trail and his early days in office, he was "really, really smart." Moreover, the best and brightest Americans were going to be falling all over themselves to submit resumes and be considered for important posts in the Trump Administration.

The Face of the EPA

None of that has happened. Indeed, as far as I can tell, most of the brightest minds in policy want nothing to do with an administration that's become synonymous with incompetence, graft, and sleaze. Trump can't even seem to properly staff his legal team in a city (Washington) that is crawling with them. Name a policy domain and you'll run up against a wall of self-serving graft and incompetence.

I nominate Scott Pruitt at EPA as posterboy.


The Trade Train is Wrecked

Just look at the unfolding carnage in trade policy. America's membership in the Trans Pacific Partnership (TPP)? That was killed off with Trump's third Executive Order. The remaining 11 TPP members have moved on. The Trump gang also seems to have wrongly assumed all of America's steel and aluminum consumption came from China. When, after imposing steel and aluminum protections under a little used national security provision, allies like Canada, the EU, Mexico from whom America ACTUALLY consumes most of it's steel and aluminum cried fowl. Cue the pleas for exemptions. To argue all of this was rolled out in a completely hamfisted manner is to be overly generous in characterizing it. Indeed, most observes see all of this readily deteriorating into a pleasant little trade war.

More recently, the United States entered into talks with China on how adjust the imbalance in bilateral trade. It has been reported that two of the principals on the U.S. side, Treasury Secretary Steve Mnuchin and hard-line China critic and trade advisor Peter Navarro engaged in a shouting match in the streets of Beijing.

And then there's this absurd negotiation over the Chinese telecoms firm ZTE, which U.S. intelligence officials have warned is an arm of the Chinese state and whose products U.S. officials have been warned not to use because of national security concerns. Trump, who as a presidential candidate, led the chants of "lock her up" in relation to Hillary Clinton's alleged breaches of security protocol, now wants to facilitate the re-entry of ZTE into the American marketplace. Awesome!!! 

The North American Free Trade Agreement (NAFTA)? Well, that has been a complete circus. Someone (rumoured to be Jared Kushner) talked Trump off the cliff as he was about to sign a letter announcing America's withdraw and are now engaged in what looks like a protracted negotiation. The negotiations are nearly a year old, and all parties are still far apart on a whole range of issues. Last week, an important, if arbitrary, deadline for the U.S. Congress to consider NAFTA2.0 under the terms of 2015's Trade Promotion Authority lapsed without agreement (see also). Allowing it to lapse virtually ensures the current Congress will not consider a new deal. As it was, the recent frenzied push to conclude a new NAFTA was bound to crash into national elections in Mexico July 1.

The biggest set of problems in the NAFTA2.0 talks are some of the ridiculous U.S. negotiating positions in the talks. While it's true the NAFTA needs updating after 25yrs, the Trump Administration seems to think the existing NAFTA has only worked for Canada and Mexico and that NAFTA2.0 can only work for America. Indeed, most of the past year has been spent talking about so-called rules of origin in automobiles-- just automobiles. Rules of origin are, to some extent, necessary evils in regional trade agreements simply because there needs to be some benefit to membership in the free trade area that can't be undermined by non-members through transshipment of goods into the free trade area through the low-tariff jurisdiction. Unless you want to deepen the stage of integration being contemplated to a customs union where every member would have the same tariff rates, rules of origin are needed. Yet, they are also profoundly inefficient, burdening firms with additional paperwork and compliance costs that, for some firms in North America, have made the NAFTA's existing rules of origin more burdensome than they are worth.

The current North American content threshold for autos is 65% to qualify for tariff free treatment. The Trump Administration has proposed raising those thresholds to more than 85%, added the caveat that 50% be specifically U.S. content, and that imports from Mexico be made with labour that's paid at least $16/hr. All of this is of course is nakedly protectionist and aimed (foolishly) at protecting American automotive jobs.

Yet, the untenable demands being made don't stop there. The Trump Administration wants all the dispute settlement mechanisms excised from the NAFTA altogether. This includes Chapter 19 mechanisms for reviewing the application of domestic trade remedy laws covering dumping and subsidy. Trade remedy laws are among the most pernicious irritants in any trade relationship because they are written by legislatures with the specific intent of protecting domestic industry from "unfair" foreign competition. Every country has them, and not many countries-- not the least of which is the U.S.-- wants their latitude to apply trade remedy curbed. Chapter 19 doesn't really do this, but the perception among a lot of American politicians and critics of the NAFTA is that it does exactly that. Hence, best to get rid of it altogether. Moreover, because Canada and Mexico generally like Chapter 19 because it provides a forum to sort out whether trade remedy laws have been applied as written by the legislature (note how limited that standard is), it must not be working for the U.S.

The flipside of this is that more is made out of Chapter 19 in Canada and Mexico than is warranted-- Canada walked out of free trade talks with the U.S. in 1987 over this single issue. However, the symbolism of Chapter 19 cannot be understated. Killing it would be a clear sign of bad faith.

Another set of dispute settlement mechanisms is in Chapter 11, the so-called investor-state dispute settlement (ISDS) mechanisms. ISDS has generated considerable controversy around the world because of the perception that investor protections have been used to challenge the regulatory power of the state and lay down a set of legal mechanisms available only to foreign firms-- all of which are overdrawn when cast against modern versions of these rules in recent trade agreements. Given the multinational quality of many American firms, and the importance of investor protections abroad for many of them, Team Trump's desire to scrap these provisions is unpopular with much of the U.S. business community.

In addition to the basic threat of scrapping the NAFTA, Trump has tried to gain leverage over Canada and Mexico by holding out the prospect of reimposing steel and aluminum tariffs on both if they don't go along with U.S. demands. Not far removed from those blackmail efforts are Trump's more generalized threat to get tough on Mexico in the NAFTA2.0 talks if Mexico City doesn't get more serious about stopping the flow of migrants north to the United States. What Trump expects Mexico City to do is a bit unclear, but the threat is very real.

Connected to this is Trump's further promise to eliminate Chapter 16 of the NAFTA detailing the provisions of temporary entry for professionals. While post-NAFTA trade agreements like the U.S.-Chile and U.S.-Singapore FTAs in 2004 contain temporary entry provisions (part of the H-1B Visa category, and numerically limited), only the NAFTA created an entirely new visa category, the TN Visa.

Some in Trump's orbit paint the TN Visa as having been exploitatively used by people of dubious professional standing-- unsurprisingly, Mexicans-- to enter the United States and take everyone's jobs. Nonsense. Relative to Canadians and Americans who, by and large, have been able to show up at ports of entry and apply for a TN Visa on the spot and still catch their flights, Mexicans have had numerous hurdles put in front of them from the very beginning. Hence, while the precise numbers of nationals from each country taking advantage of the TN Visa is not measured by DHS or State, Mexicans certainly make up the smallest cohort of the some 800,000 TN Visa holders in the United States.

In the current climate of populist nativism around immigration, it was always hard to imagine updating Chapter 16 as actually required. The current list of professions qualifying for the TN Visa is 25yrs old; many occupations have disappeared, newer professions are not listed. A NAFTA2.0 would ideally keep the TN Visa, but adopt the more flexible educational attainment level (a Bachelor's Degree or higher) to qualify. This is the standard set in most modern agreements and will never need updating as old jobs disappear and new ones are created.

Oh, and then there's agriculture, intellectual property, government procurement (the U.S. has demanded dollar-for-dollar reciprocity there-- think about that), and services, each of which is difficult can of worms yet to even be opened.

What's the Rush?

Over the past several weeks, Ottawa and Mexico City have been pushing hard to complete a deal. I don't understand why? Mexican elections in July? Important, sure. Congressional mid-terms in the U.S. this fall? Sure, also important. U.S. Trade Promotion Authority procedures for considering NAFTA2.0 important? Yeah, sort of (see above).

If Prime Minister Trudeau were to give me a ring and ask about strategy, I'd tell him to chill. In fact, I'd tell him to drag out the talks as long as possible, dare Trump to pull the plug in frustration. As the Trump Train continues to go off the rails, his need for a victory will grow. That might mean he makes good on his promise to kill the NAFTA; something I think he's leaned toward all along.

Innocent Times... August 2017

A "skinny," incomplete NAFTA2.0 that meets some electoral or U.S. Congressional timetable isn't likely to be good for Americans, much less Canada and Mexico. Why force the issue, especially if it means capitulating on so many issues?

Moreover, the last time I checked, elections were a regular event in democracies (hope it stays that way). Trying to negotiate an important and complex revision to rules governing trade between economies totaling $17 Trillion shouldn't be done in haste, and can't always be done in between elections.

If NAFTA2.0 is to happen, it ought to be done properly.