It’s reasonable to grant US President Donald Trump his victory for extruding a new trilateral agreement on North American trade into being and at the same time worry about it. The president, during his election campaign, promised to replace the North American Free Trade Agreement. If Congress approves, he will have done so.
The best part of the agreement, however, doesn’t appear in the text. The deal’s mere existence keeps the US, Canada, and Mexico from hunkering into economic isolationism and spiraling into a three-way trade war. Oil and natural gas, produced in growing amounts in unconventional plays and from offshore, thus remain mostly free to move between the countries in response to market forces. And North America retains its potential to become a continental energy superpower if governments support the necessary work.
Other benefits
The oil and gas industry will benefit in other ways if signatories ratify the US-Mexico-Canada Agreement (USMCA). After US and Canadian negotiators announced on Sept. 30 they had reached a compromise bringing Canada into an accord already supported by Mexico, the American Petroleum Institute noted the importance of continued market access for US natural gas and oil products and for US investments in Canada and Mexico. It also welcomed “continued zero tariffs on natural gas and oil products; investment protections to which all countries commit and the eligibility for Investor-State Dispute Settlement (ISDS) for US natural gas and oil companies investing in Mexico; requirement that Mexico retain at least current level of openness to US energy investment; [and] additional flexibility allowing US customs authorities to accept alternative documentation to certify that natural gas and oil have originated in Canada or Mexico upon entering the US.” API Pres. and Chief Executive Officer Mike Sommers urged Congress to approve the update to trading relationships. “Retaining a trade agreement for North America,” he said, “will help ensure the US energy revolution continues into the future.”
That’s important. Beyond energy, though, judgment about the USMCA is mixed. The agreement modernizes NAFTA, which Trump once called the worst trade deal ever, and makes other changes that cannot be called grand. Canada yielded somewhat on dairy protections but retained a dispute-settlement mechanism it considered vital. Mexico yielded on wage minimums intended to move vehicle-manufacturing jobs northward.
The USMCA changes vehicle-content requirements importantly. But the effects are unpredictable and might, trade experts warn, conflict with intent. The North American-content threshold for tariff-free imports of vehicles rises to 75% from 62.5%. The agreement also requires that 70% of the steel and aluminum in vehicles come from North America and that 40% of vehicles be manufactured by workers making $16/hr or more. Auto manufacturers might profit from using low-cost parts not fitting the metrics and letting the savings compensate for exposure to the most-favored-nation tariff, which for passenger cars is only 2.5%.
At least as important as the agreement itself are ramifications of the deal-making that produced it. Trump’s tactics follow a now-familiar pattern: Squeeze and settle. In trade negotiations, the president applies pressure with tariffs and negotiates while counterparties are off balance and eager to end the strain. In a limited way, the tactic worked with NAFTA renegotiation. Whether it can succeed with a larger competitor—that would be China—remains to be seen.
Economic cliff
By now, Beijing and other power centers must see that Trump exaggerates problems to justify his arm-twisting but becomes willing to accept incremental gain so he can close deals and claim victory. They also must know that he exploits America’s economic and geopolitical power when he does this, depleting some measure of superpower influence every time.
The US, Canada, and Mexico have stepped back from an economic cliff by averting trade conflict that might have weakened the oil market. Trump seems determined to take the same precarious walk with China and Europe. The USMCA is best seen as a source of relief. It’s not a reason to stop worrying.