Doesn’t the US-Mexico Deal Hinder Free Trade?

America and Mexico have reached a preliminary bilateral agreement on a revised version of the North American Free Trade Agreement. In order to increase the percentage of American-made parts used by auto manufacturers, the new deal will remove the provision that allowed for tariff-free export of auto parts – a true “Made in America” clause.

The Trump administration appeals to the notion of taking back jobs that Mexico has stolen, claiming national security as the reason for imposing steep tariffs on Mexican auto parts. This is how America gets its way. It is likely that, to reduce trade tensions between the two countries, someone will have to hint at imposing sanctions in order to force a compromise – a method which could also affect Japan and set a troublesome precedent.

Established in 1994, NAFTA was initially a trilateral agreement between America, Canada and Mexico. Revising NAFTA was part of the Trump administration’s campaign platform, and they began renegotiation one year ago. America’s two main demands were that the percentage of auto parts made in America be raised from 62.5 percent (under the trilateral deal) to 75 percent, and that 40 percent to 45 percent of parts must be manufactured in factories that pay workers at least $16 per hour.

Trump has ensured supporters that with this agreement, demand for American-made auto parts will increase. However, this does not guarantee that production will move to American soil, as Trump believes. American auto factories pay about $20 per hour, compared to about $7 per hour in Mexico. In order to work around the new stipulation, couldn’t manufacturers increase the wage in only a portion of its factories in Mexico? If so, this will cause American consumers to bear the brunt of rising costs.

This could also impact Japanese companies with a growing auto manufacturing presence in Mexico. These makers produce parts in Mexico, where wages are low, and export them to America without tariffs. Now, the effects of a wage increase and the changes to the supply chain are close at hand, and it is unlikely the repercussions will remain limited to North America.

America also wants to include Canada in this new version of the trade agreement by the end of the month, but the future is unclear. If negotiations collapse, it would mean a tremendous impact on Canadian corporations that export to America.

It’s highly likely that the Trump administration will continue to stubbornly avoid multilateral talks and pursue bilateral negotiations. The multilateral system at the core of the World Trade Organization may very well lose its power. Cabinet-level trade negotiations are scheduled to take place in September, and it will be important to keep a close eye on America’s next move. I hope the Japanese government will stick to its multilateralist principles.