Trump To Withdraw From World’s Largest Free Trade Agreement

President Trump said Saturday that he intends to use his executive authority to withdraw from the North American Free Trade Agreement. Speaking to reporters on Air Force One, Trump said that he will soon notify Canada and Mexico of the United States intent to leave the trade pact.

“I’ll be terminating it within a relatively short period of time. We get rid of NAFTA. It’s been a disaster for the United States,” Trump said, adding, “And so Congress will have a choice of the USMCA or pre-NAFTA, which worked very well.”

The Trump Administration has negotiated a new agreement, which the US refers to as the United States-Mexico-Canada Agreement (USMCA), that is intended to replace NAFTA. NAFTA is the world’s largest free trade agreement and has led to dramatic economic growth in all three nations.

Trump’s intention is obviously to give Congress the choice of either the new deal or no free trade agreement at all. NAFTA reduced tariffs among the three nations so destroying the pact would have the effect of raising tariffs even further and slowing trade. Already, American agriculture, small manufacturing, and shipping have been damaged by the trade war.

The new trade pact, which is also referred to as the “New NAFTA,” has received mixed reviews. On the plus side, the deal contains increased protections for intellectual property, agrees to prevent currency manipulation, and opens American access to Canadian dairy markets. On the downside, the treaty automatically expires in 16 years unless it is renewed and, in an apparent attempt to limit US investment in Mexico, the Trump Administration insisted on limiting protection from regulatory abuse. Further, the new deal increases the percentage of domestic content required to exempt new cars from tariffs.

Rather than free trade, the Wall Street Journal says of the USMCA, “This is politically managed trade, and its economic logic is the opposite of Mr. Trump’s domestic deregulation agenda.” The paper’s editorial board added that the “auto gambit is part of the Trump-Lighthizer strategy to blow up global supply chains.”

The main attraction of the Trump trade pact is that it is better than a reversion to pre-NAFTA rules with their return to increased tariffs and regulations. Economists say that the new deal won’t boost economic growth or increase manufacturing jobs. Its new limitations on free trade will end up costing American consumers more money while giving them less choice.

There is also debate on whether President Trump has the authority to unilaterally withdraw from NAFTA. The treaty includes a provision that allows for withdrawal after a six-month notice, but opponents say that since NAFTA was approved by the Senate, leaving the pact would also require Senate approval.

A 2016 report by the Congressional Research Service addressed the question of a unilateral withdrawal from NAFTA by the president. “As a practical matter, the President’s communication of a notice of termination of an FTA [free trade agreement] to trade partners in accordance with the FTA’s terms59 appears sufficient to release the United States from its international obligations,” the report says, but  notes, the “President could not repeal federal statutes implementing the FTA in the absence of congressional action because the Constitution gives Congress the authority to impose duties and to ‘regulate commerce with foreign nations.’” In other words, the president’s notice to terminate could be a withdrawal in name only if Congress does not change the US laws and regulations to differ from what the treaty requires.

The report also points out that “the Constitution apportions authority over international trade between the President and Congress.” The legality of Trump’s move is not specifically addressed in the Constitution and there is no precedent for a president unilaterally withdrawing from a trade treaty.

If President Trump goes through with his move to unilaterally claim the executive authority to withdraw the United States from a successful trade deal with its two largest trading partners, it will almost certainly provoke a constitutional crisis as well as an economic one. The Senate is controlled by Republicans but many oppose the president’s protectionist trade policies. Republican Senate leaders may be forced to sue to overturn the president’s abuse of executive authority or choose between either a badly flawed trade deal or no deal at all.

Why NAFTA Beat Populism the First Time

During a campaign that saw perhaps six positions on almost every issue, there was one that Donald trump staked out that NEVER CHANGED: his opposition to NAFTA, the North American Free Trade Agreement. Established in 1994, the sweeping agreement changed the economic game in Canada, Mexico and the United States, and was the most debated issue in it’s time. Even more than HillaryCare.

Now, he’s issuing conflicting messages and threatening a trade war with Canada, literally over spilled milk. And some, like Sen Ben Sasse (R-NE) are speaking up with some common sense:

“Yes, there are places where our agreements could be modernized but here’s the bottom line: trade lowers prices for American consumers and it expands markets for American goods. Risking trade wars is reckless, not wise.”

Many trump supporters say, “it’s what he campaigned on.” So? He campaigned on many things. Sometimes, many opposing sides to the same thing. That doesn’t mean it should be carried out.

Still, on this, he was consistent. Why?

Donald spoke against it early on, even before adoption in the 90’s. He always brought it up in light of our trade history with Japan and other foreign markets with whom we didn’t have free trade agreements. And some concerns were legitimate. Our country had just gone through a massive structural economic change in the 1980’s, and many were unsure of what this agreement would do to stop that change, or reverse it. But this wasn’t Japan. This wasn’t a “bad deal.” Doing nothing was the “bad deal.”

There was a flaw in the premise of their argument: they believed the government should have worked harder to stop the natural course of things, in commerce, and protect special interests from the inevitable. Some didn’t want to simply slow down the impact, they wanted to return to the Laverne & Shirley days, where everyone could get a factory job, a steady paycheck, and pension. Mexico was just a place you saw in the movies, and went on a bender at the border. Lower skills, higher cost, less choice.

All his life, Donald has been a populist. He goes with what sells. And in business, you cannot blame him. In fact, it’s laudable. As a salesman myself, I relate to the impulse to sell what people want, and feed their most primitive desires. People buy what they love. And people love stability and gratification.

Yet as public policy, this is a terrible compass. And most leaders in business and government understand that certain truths exist about human nature, and the way a free market operates. Free businesses will always seek the easiest way to produce the most product, sell it to the most people, and to do it for the lowest cost. Likewise, free people will always seek to buy the most affordable products, from the easiest source, and for the lowest price.

Perhaps government can work to slow down the worst effects of a rapidly changing situation, but to stop it, or reverse it is terrible policy, and counterproductive.

Canada already had a free trade zone with Mexico for years, leaving the American market in an awkward disadvantage. So, NAFTA passed by a decent, bi-partisan margin in late 1993, and went on to create the most valuable, dynamic trade zone in human history. It was intended to slowly eliminate tariffs and conform standards on many aspects of trade in the next 10-15 years. NAFTA set provisions in place for intellectual property, environmental issues, agricultural standards, and transportation infrastructure. Before NAFTA, construction and transportation costs were higher, service industries were less efficient and things like fiber optic telecommunications were even difficult to complete.

In retrospect, this is why leaving NAFTA is a bad idea. It would reverse course on almost everything, cost us trillions of dollars in trade, and destroy agreements from the environment to agricultural standards. It would arguably cause far worse than the naturally-occurring damage that was sped up by the signing of the treaty. But also, because after all these years, many of the negative concerns have already been addressed by the free market, and no longer exist.

A mere four years after the passage of NAFTA, trade had already exploded with Mexico (it’s now 500% higher than 23 years ago), and costs had plummeted for American businesses. Yes, some jobs went south, but more were created up north, and the increased profit led to greater income and quality. Even I got caught up in the “trade deficit” argument for so long, that I failed to see the underlying point: trade is good for improvement, in everything. Now, industries have shifted, standards have risen, profits have increased, and even entirely new industries have come about, creating hundreds of thousands of unique jobs, while millions have been altered, or shifted from one sector to another. Now, the North American Free Trade Zone covers nearly 500,000,000 people and is the grease of a $21 trillion market.

While our trade deficits have doubled or tripled, our costs have plummeted. Meanwhile, their economies have improved, and over time, some industries even reversed. We saw this in the Japanese auto market, as the corporations eventually saw the benefit of moving operations back stateside. Hondas are built in Ohio. Toyotas are built in Kentucky. Nissans are assembled in Missisippi. Not Mexico. The free market at work. Even the union rag, Automotive News admitted that NAFTA led to better cars, lower costs and greater profits. I’m sure that was difficult.

All this talk about “tweaking” or “improving” NAFTA is counterintuitive. Where there is a free market, any “tweaking” is, by definition a backward step, away from the “free” part. Trade wars never work out in an economy that depends on the quick movement of goods, services, and information. Why would anyone want to slow it down?

One of the greatest arguments for free trade is the foreign policy impacts, reduction of intrastate conflicts and the pressure of democratization. These things are stronger today, and Mexico is changing, albeit very slow. Ultimately, the greatest fears of NAFTA, the loss of millions of jobs never materialized, according to a Congressional Research report. And the economic changes that occurred were a tradeoff for lower unemployment, greater profits, more choices, and better efficiency.

The entire argument against NAFTA, or TPP for that matter, comes from a place of progressive thought; the government should manage outcomes, subsidize preferred industries and protect economic interests from the natural effects of a free market. I disagree. And so do the principles of a free market.

Donald trump opposed NAFTA because it was a populist message that resonated with the common man.Even if it wasn’t in their best interest, the masses could be whipped into anger by a changing world because, well, most people don’t like change, and simple messages resonate. It was a simple one: “NAFTA hurts manufacturing jobs!” No, a changing economy hurts manufacturing jobs, and our government got out of the way of letting it change.

But, we got used to it, and eventually that change became our status quo, because freedom always wins over suppression. Change is hard, but a part of human progress.

Now, trump wants to go backward, because its a simple message, and he thrives on the simplest messages. Repealing NAFTA is a reactionary thing, and he’s nothing if not reactionary. Returning to the 1980’s reminds some of the “good ole’ days,” and that always appeals to the masses. But, it will meet more resistance than he thought. And NAFTA beat populism the first time because cooler heads prevailed, and economic freedom appealed to more people than not. That will always be the case in a nation of people who value freedom.

 

 

Mr. President, You Did the Right Thing

No government document is perfect and that includes treaties. The North American Free Trade Agreement is not a perfect document and not a perfect treaty. It has been blamed for the loss of jobs in this country, but the reality is those jobs came because of shifts in the economy already underway that NAFTA sought to address. For every sad story of a job loss blamed on NAFTA, there is at least one other, if not more, that would not exist but for NAFTA. But NAFTA is not perfect.

The President’s staff had pushed him to withdraw the United States from NAFTA. Instead, after consulting with the leaders of Mexico and Canada, President Trump has decided to preserve NAFTA, but seek changes. Many of the changes he would like are changes that were already contemplated in the Trans Pacific Partnership and have already been agreed to by Mexico and Canada.

President Trump has the opportunity to preserve a strong free market, while ensuring help for displaced workers and getting those changes through the Congress. Until President Trump, Washington pundits loved it when leaders changed their minds. Now, they think his change of mind is ridiculous. Actually, it is appropriate and the President should be commended for seeking out the opinions of others and choosing wisely.

The Good, The Bad and the Ugly of Trump’s First Week

As President Trump’s first week on the job takes its place in the history books, we can take a moment to look back on the good and the bad of the new administration. I was not a Trump supporter. I did not vote for Mr. Trump or for Hillary Clinton. Nevertheless, as a conservative, I can find things to applaud in Mr. Trump’s effort. Unfortunately, I can also find some of the things that made it impossible for me to vote for him in the first place.

Let me say first that many of Mr. Trump’s appointments have been very good. It seems that his appointments for military and security jobs are particularly sensible. Most of the issues that I have with his cabinet and staffers relate to economic positions where it seems that the president and his advisors lean toward a Keynesian viewpoint.

On his first day in office, Mr. Trump issued an Executive Order that directs the Department of Health and Human Services to “waive, defer, grant exemptions from, or delay” parts of the Affordable Care Act that place a financial burden on individuals, health care providers or states.” The order effectively tells the HHS not to enforce the Obamacare mandate. This is a partial fulfillment of a major campaign promise.

On Monday, President Trump began with an assault on free trade pacts. President Trump, in keeping with his campaign promises, signed a memorandum to withdraw from the Trans-Pacific Partnership and signaled his intention to reopen negotiations on NAFTA, the free trade agreement with America’s two largest export markets. Scuttling NAFTA could lead to major problems for the US economy while the dissolution of the TPP could give China a major window for expansion. Neither would be good for American businesses and consumers.

Other new policies are better news for conservatives. The president ordered a hiring freeze of nonmilitary government workers in an effort to reverse the growth of the federal government. The order “prevents filling vacant positions and creating new positions except when necessary to meet national or public security responsibilities,” press secretary Sean Spicer told CNN. The order also states that “contracting outside the Government to circumvent the intent of this memorandum shall not be permitted,” closing a major loophole of previous hiring freezes.

In another move that should please pro-life conservatives, the president restored the Mexico City Policy which prohibits international groups that perform or promote abortions from receiving federal funds. The policy was implemented by President Reagan and rescinded by President Obama in 2009.

On Tuesday, the president signed memos that would revive the Keystone XL and Dakota Access pipelines. The Keystone pipeline would run from the Canadian Oil Sands of Alberta to Nebraska while the Dakota pipeline would go from North Dakota’s Bakken oil fields to Illinois. Both projects languished under President Obama and are important for the economy and energy independence. At the same time, Mr. Trump ordered federal departments to help streamline permitting and regulations for manufacturing projects.

On Wednesday, Trump fulfilled another campaign promise with two Executive Orders. The first established the “construction of a physical wall on the southern border” as official US policy and called for hiring 5,000 new Border Patrol agents. ABC News reports that Republican congressional leaders will back Trump’s plan for the wall with plans to authorize $12-15 billion for its construction. Last July, Politico wrote that many Border Patrol agents, even those who supported Trump, consider the wall “an expensive, pointless boondoggle, [that] wouldn’t solve the main problems with border security.” Trump’s second immigration order sets priorities for deportation of illegal aliens and aims to strip federal funds from sanctuary cities.

The Trump Administration continued to maintain that Mexico will either pay for the wall or reimburse the US for its cost. On Thursday, press secretary Spicer suggested that a 20 percent tariff on Mexican imports could be used to fund the wall, prompting Mexican president Enrique Peña Nieto to cancel a planned meeting with President Trump. Millions of Americans whose livelihoods depend on trade with Mexico doubtless hope that relations between the two countries can be patched without a trade war.

On Friday, Trump signed another Executive Order, at least parts of which will please many conservatives. President Trump suspended the Syrian refugee program and halted immigrations from the countries of Iran, Iraq, Syria, Sudan, Libya, Yemen and Somalia for 90 days. The Order also suspended the US Refugee Admissions Program for 120 days until it is reinstated for refugees that can be properly vetted. The total number of refugees that the US will admit will be reduced from 110,000 annually to 50,000.

The order also gives the Department of Homeland Security the ability to prioritize Christian refugees from the Middle East. According to CNN, the Order allows DHS to give priority “on the basis of religious based persecution” as long as the person applying for asylum is “a minority religion in the individual’s country of nationality.”

The Mexico kerfuffle is probably the ugliest aspect of the week, but Mr. Trump’s penchant for taking his eye off the ball and making off-the-cuff remarks and tweets also caused damage. Among the things better left unsaid were Trump’s unsupportable claim that 3-5 million illegal immigrants voted in the election, the pointless argument over the size of the crowd at the inauguration, his apparent endorsement of torture and his threat to “send in the Feds” to Chicago. That the new administration is now indelibly linked to the phrase “alternative facts” is disconcerting.

Though well-intentioned, there are obvious problems with President Trump’s use of executive actions to advance his agenda. Using Executive Orders to bypass Congress was a major complaint of conservatives about President Obama. Additionally, these orders may last only as long as President Trump’s term. Mr. Trump’s successor could change these Executive Orders as easily as Mr. Trump changed President Obama’s. Many of them do chart a course that will please Republicans, but ultimately Mr. Trump will have to make these changes permanent by working with Congress and persuading some Democrats to back his agenda.

Even though I didn’t support Trump as a candidate, so far he has proven to be a better president than Hillary Clinton would have been. Admittedly, that sets a very low bar. I still can’t consider myself a Trump supporter, but I will support and encourage him when he makes the right choices as he did on several of his executive actions this week and with many of his appointments. On the other hand, when he needs to be criticized, as he does on trade, some aspects of his immigration policy and saying things that are not thoughtful or presidential, conservatives should nudge him in the right direction.

Trump Declares War On Free Trade Treaties

It’s only the beginning of his first week as president and Donald Trump is already moving to keep his campaign promises to trash free trade agreements. Before the coffee was cold Monday morning, President Trump had already announced his intention to withdraw from the Trans-Pacific Partnership and to sign an Executive Order to renegotiate the North American Free Trade Agreement.

“We will be starting negotiations having to do with NAFTA,” Trump said Sunday at a swearing-in ceremony for his top White House advisers covered by NBC News. “We are going to start renegotiating on NAFTA, on immigration and on security at the border.” The Executive Order withdrawing from the TPP was expected to be one of Mr. Trump’s first acts on Monday according to CNN. As I write this, the TPP page has already been removed from the US Trade Representative website.

During the campaign, Trump was critical of trade agreements that he called a “bad deal” for the United States. Trump blamed NAFTA for the migration of many US companies and factories to Mexico and other countries.

In spite of Trump’s claims, the website of the outgoing US Trade Representative shows that NAFTA has benefitted the US as well as Mexico and Canada. US exports to Mexico have increased by 468 percent since 1993 when NAFTA was implemented. Contrary to the popular belief that free trade is a one-way street, Mexico is the second largest export market for the US, accounting for almost 16 percent of all US exports. Only Canada imports more US goods.

While President Trump and the anti-traders among both parties blame cheap Mexican labor for enticing American companies to relocate, the real story is not that simple. When Trump negotiated a deal to keep an Indiana Carrier plant in the US, the company ended up eliminating many jobs due to automation anyway. The high cost of labor in the Indiana plant was not cost-effective for the low-tech products made there. Reneging on free trade agreements will not make American labor more cost-effective than machines.

The Carrier deal also hinged on tax credits for the company. The United States has the highest corporate tax rate in the free world. Only the United Arab Emirates and Puerto Rico, a bankrupt US territory, are higher. At 30 percent, Mexico’s corporate tax rate is above the international average, but still far lower than the US rate of 38.9 percent.

Ironically for Trump’s anti-trade agenda, another part of Mexico’s economic success is the country’s commitment to free trade. Mexico has numerous free trade agreements with countries in Central America, South America and Europe as well as with Israel and Japan. The ability to make products in Mexico and ship them abroad without taxes that would be incurred on US exports has attracted some US manufacturers.  When Ford announced that it was moving small car production to Mexico, a key reason was that most of those vehicles would be sold in countries where Mexico had free trade agreements.

If Trump can wring a few concessions out of other countries to improve trade deals, then the US may benefit. If he ultimately plans to scuttle NAFTA as well as the TPP, then it will be bad for US companies, workers and consumers.

According to Yahoo News, Trump claims to favor trade treaties with individual countries rather than multinational trade pacts. Trump’s plan would, for a similar amount of effort, craft a trade deal with one country rather than a dozen. It would also leave US businesses to navigate a patchwork of trade regulations that vary from country to country rather than a consistent set of rules for North America and the Pacific countries.

The Center for Automotive Research estimates that withdrawal from NAFTA or implementing punitive tariffs could cost 31,000 US automotive jobs. Prices for cars sold in the US would almost certainly rise due to both tariffs and the higher cost of manufacturing in the US. As a result, fewer cars would be sold.

An additional factor is that if the US withdraws as a free-trade partner, it is likely to be replaced by China. In addition to loss of market share for US companies, that would entail a loss of leadership in setting regulatory standards since, without NAFTA, the US small car market is smaller than that of China and the European Union. American standards and engineering would have less influence on auto design and construction as the American market for small cars shrinks.

By rejecting the TPP, the Trump Administration may well be pushing other nations of the Pacific Rim toward a free trade agreement with China. CNN Money reports that the Chinese are already inviting many countries that would have been in the TPP to form a Regional Comprehensive Economic Partnership (RCEP). The RCEP may ultimately include staunch US allies like Australia and Japan as well as allowing China to make further inroads to Latin America.

Overall, there is a large potential downside to tinkering with a free trade agreement that has been an enormous success and scuttling another that will open a door to Chinese expansion. Edward Alden, a senior fellow at the Council on Foreign Relations, told CNN Money that he was “baffled” by Trump’s protectionist hostility to the trade treaties.

Alden questions Trump’s penchant for deal-making. “Trump has single-handedly given away an enormous source of leverage over China,” Alden said. “The first rule of negotiating is don’t give away something for nothing, and he’s done that right off the bat.”