Trump has just revolutionized global trade by replacing NAFTA with USMCA
Trump administration negotiators reached a major agreement with Canada on trade over the weekend. The breakthrough, which came on the heels of an earlier deal with Mexico, vindicates President Trump’s tough approach to reforming trade and will mark a fundamental turning point for American jobs and global power.
The new U.S.-Mexico-Canada Agreement (USMCA), which replaces the North American Free Trade Agreement (NAFTA), is much more than just a new name.
Some of its breakthroughs include:
- Aiding farmers by curbing Canada’s high tariffs and low quotas on U.S. dairy products.
- Reinvigorating U.S. car manufacturing. Previously 40 percent of a car could be made in China or other places with few labor or environmental standards and still considered to be “North American” and imported cheaply into the USA. The agreement drops this foreign portion to 25 percent.
- Easing the burden on sick Americans who fund drug development by paying full price for patented drugs. Both Canada and Mexico have agreed to respect drug patents on biologic drugs—the most promising field of new cures—for a period of 10 years, which means Americans won’t be only ones from whom drug companies can recover expenses.
NAFTA was the most hated trade agreement in U.S. history. A poll earlier this year showed a plurality of Americans wanted to leave the agreement and only one in three thought it was beneficial. That’s why self-described “free traders” who have whined incessantly about Trump’s use of tariffs and other aggressive tactics should praise him. Trump has taken a pact that facilitated crony trade and replaced it with one that is durable and preserves liberalized trade in North America. It also serves as a new standard for trade agreements with other counties, especially its provisions to protect U.S. digital services and intellectual property—a big part of the future economy.
We pay for Europe’s defense and it rewards us with a 10 percent tariff on U.S. cars (compared to our 2.5 percent tariff) and impenetrable barriers to U.S. agriculture, especially by France.
The new deal also shows that Trump will put aside political differences when it comes to protecting American jobs and profitability. The National Football League (NFL), which Trump has criticized repeatedly for its players’ appalling displays of disrespect to the American flag, won big. The new agreement ends a practice by which Canada made NFL broadcasters show the same commercials in Canada that it did in the USA, precluding a major source of advertising revenue for the league.
USMCA also ends the practice in the Canadian province of British Columbia of elevating the price of American wine imports, which will particularly help hyper-liberal wine-growing northern California. When it comes to defending American interests, Trump is the president of all America, not just his political supporters.
There are still other big trade fights on the horizon. The Trump administration is also seeking major changes to trade relationships with China, the European Union (E.U.), and Japan. This new North American deal comes on the heels of agreements with South Korea.
To paraphrase Winston Churchill, this isn’t the beginning of the end, but it may be the end of the beginning of creating a new world order of trade.
Trade talks with Japan, with which the U.S. has a long-running trade deficit, recently were transformed from unserious to serious. Japanese Prime Minister Shinzo Abe just agreed to a formal process that should lead to an agreement.
China will be much tougher, especially since it benefits from a massive $376 billion trade in goods deficit. The communist government there has built an economy that depends on stealing intellectual property from America and other advanced economies. It also manipulates its currency and has high tariffs, including one that is ten times the U.S. rate on autos. It will likely take years of sustained pressure on China to change, but in the meantime we can bias trade and investment away from China.
Europe too is dragging its feet on trade reform, despite signaling a willingness to agree to fundamental reform. We pay for Europe’s defense and it rewards us with a 10 percent tariff on U.S. cars (compared to our 2.5 percent tariff) and impenetrable barriers to U.S. agriculture, especially by France.
Trump has threatened higher tariffs on cars and auto parts to force negotiations. One of the innovations of the USMCA is that it exempts Canadian and Mexican companies from future tariffs like these up to certain levels. That now leaves the Trump administration with the ability to levy car tariffs without directly affecting the North American auto industry.
Don’t expect Wall Street or the “free trade” experts in Washington to give Trump credit for this breakthrough or accept his tough tactics, including the tariffs. But by the end of Trump’s first term, Americans will see a sustained booming economy that benefits all of North America and the other advanced economies that are willing to play fair with us.