US NAFTA withdrawal threat plays politics with trade

US NAFTA withdrawal threat plays politics with trade

There was a collective sigh of relief on Oct. 31, 2018 when the parties renegotiating the North American Free Trade Agreement (NAFTA) announced that a handshake deal had been reached on the terms of a new NAFTA. After more than a year of handwringing, nail biting, lobbying, and sometimes less-than-diplomatic grandstanding, the parties had at long last found common ground.

The new NAFTA, or the United States-Mexico-Canada Agreement (USMCA) as Washington has coined it, may not necessarily be embraced equally by all stakeholders, but at the very least it reaffirmed the continuity of free trade in North America. Continental supply chains could continue to function effectively. Investors could rest assured their planned return on investment (ROI) would be realized, save for organic economic shifts. Entire industries and their laborers could find solace in the greater certainty the new deal offered.

A shifting balance of power

With the recent US Congressional elections came a shift in Washington’s balance of power. As Democrats take the majority of the US House of Representatives on Jan. 3, 2019, the fate of the new free trade deal is not certain. Many express concerns Democrats will quash the USMCA as political punishment against President Donald Trump. Others opine the Democrats will argue the deal is too light on enforcement of new labor provisions.

Indeed, current Minority Leader Nancy Pelosi, D-Calif., who is all but assured to resume her previous role of House Speaker, has already indicated that Democrats could not support the USMCA unless provisions around labor and environment had stronger enforcement mechanisms. To help nudge Democrats closer toward USMCA ratification, the president mentioned in passing during the G20 summit in Buenos Aries that he will withdraw from NAFTA. The goal, of course, is to present Congress with an ultimatum — either ratify the USMCA or have no agreement at all. In doing so, the president is betting Americans will blame any loss of free trade on Democrats.

Whether the president has earnest intent to do away with a trilateral agreement he has often referred to as the “worst trade deal ever,” or whether it’s just political posturing is anyone’s guess. But the comment itself and the outcome of such a move restores the uncertainty that characterized the NAFTA renegotiation period.

The risk of a free-trade gap

A formal announcement of withdrawal from NAFTA would put the United States on a six-month timeline to exit the deal. That may seem inconsequential given that a new deal is already on the table, but it’s not.

The fate of the USMCA remains uncertain. The US International Trade Commission (ITC) is already working on its obligatory report to Congress on the economic impact of the proposed trade deal. What the report will reveal is not yet known and may not be until March 15, 2018, the deadline for the ITC to deliver the report to Congress. Once the report has been issued, the multistep process toward ratification will begin. The timeline of that process, however, remains uncertain as it is contingent on numerous timely actions by Congressional bodies. Furthermore, the vote would be a straight up or down vote, prohibiting amendments.

Assuming the report identifies potential risks or shortcomings within the agreement, ratification isn’t necessarily guaranteed. Even if the USMCA is ultimately ratified, it won’t go into effect until three months after the last of the three signatory countries ratifies the agreement.

In short, the timeline for a NAFTA withdrawal is definite while the timeline for the USMCA’s implementation is not. This opens the possibility of a gap period between a NAFTA withdrawal and the USMCA’s implementation (assuming it’s ratified). Such a gap period would create confusion with respect to the customs regime in place for goods entering the United States and would most likely increase landed costs for traded goods — a fate similar to that facing the United Kingdom as it moves closer to the Brexit deadline without a deal in place.

A real-time case study in uncertainty

One need only to look to the other side of “the pond” to understand the impact of this kind of uncertainty. Businesses are already front-loading or stockpiling inventory in advance of Brexit for fear a disadvantageous customs regime may follow Brexit day. UK think tank Centre for Economics & Business Research, estimates UK companies could import as much as 40 billion pounds ($50.5 billion) in stockpiled merchandise ahead of Brexit.

Similarly, US businesses have been expediting imports from China to circumvent the application of tariffs on their wares, due to the ongoing trade dispute between the two economic superpowers. That rush on imports has resulted in a widening of the US trade deficit with China to the tune of $55 billion — the largest trade deficit with China since 2008. This is exactly the opposite of what the Trump administration wanted to achieve in starting its trade war.

Opening up the possibility that a break in free trade may occur in North America for an indefinite period could generate similar action elsewhere, amplifying the trade deficit between the United States and Mexico and establishing one with Canada. That’s risky business given the volume and value of trade that takes place across North America’s borders on a daily basis.

Prematurely withdrawing from NAFTA is essentially playing politics with trade economics and only serves to restore the undesirable air of uncertainty the USMCA handshake deal recently wiped away. It has the potential to negatively impact job creation and even the stability of existing jobs that rely on the free flow of goods across North America’s borders. That’s a gamble at any time, but particularly so in the lead up to the 2020 election campaign.

Given the new balance of power in Washington, the White House would be far better off using a carrot to diplomatically entice Democrats into bipartisan acceptance of the USMCA, rather than waving the proverbial stick of an ultimatum to force acceptance of a yet untested trade deal. Then again, the political climate may not be conducive to offering carrots, or accepting them.

Candace Sider is vice president of government and regulatory affairs-North America for Livingston International.