The U.S., Canada and Mexico agreed to review the North American Free Trade Agreement (NAFTA). The global economy managed to avoid the worst-case scenario that it may slide into a maelstrom triggered by the collapse of the North American free trade mechanism, which came into force in 1994.
But the three-party deal is problematic, as it includes quantitative restrictions on U.S.-bound shipments of cars and a provision that prevents the other countries from devaluing their currencies. We do not want the U.S. to force Japan and Europe to accept a similar deal.
The U.S. snatched a better deal in the United States-Mexico-Canada Agreement (USMCA) by threatening Canada and Mexico with the imposition of sanctions on their car exports to the U.S. Washington will modify the conditions for eliminating auto tariffs on imported vehicles and include provisions and clauses that effectively lead to increasing the procurement of U.S.-made parts.
What is more problematic is the introduction of quantitative restrictions on U.S.-bound car exports. Canada and Mexico are not allowed to export more than 2.6 million cars to the U.S. per year. Shipments exceeding this ceiling will be subject to a 25% tariff. This mirrors a controlled trade practice that runs counter to the international rules.
Anxiety receded from businesses and markets across the globe after NAFTA was prevented from being fallen apart, but the agreement is by no means a welcome deal. Automakers of the major economies will be forced to review their North American business strategies to meet the conditions covering U.S.-bound exports and the sourcing of parts and components.
The U.S. also made South Korea and Brazil agree to its export restrictions. If the U.S. Trump administration controls the flows of goods at its own discretion, resources may not be distributed effectively and the global economy may be hampered from growth.
Currency provisions will be also incorporated into the new NAFTA deal. To meet the U.S. demand, the language will be stipulated that each party should “refrain from market intervention and competitive currency devaluation.”
The G20 nations agreed to avoid competitive devaluation. We take it for granted that the U.S., Canada and Mexico must comply with this, as they are G20 members. But the introduction of currency clauses may be used as an excuse to interfere in other nations’ currency and monetary policies and confuse markets.
A worrying factor is not only the future course of the new NAFTA. Getting the taste of success, the Trump administration may demand Japan and the European Union accept a similar deal in its trade negotiations with them.
The U.S. should refrain from using the approach of controlled trade recklessly. It needs to retract all sanctions that it has unilaterally imposed and explore ways to promote constructive trade via dialogue. Japan and Europe should not succumb to the U.S. threat and enter into trade negotiations with the U.S. with determination to set a good example for the world.