The stock market responded immediately to news on Monday that a preliminary bilateral trade deal had been reached with Mexico, in the Trump administration’s effort to modernize NAFTA. The Dow closed above 26,000 points — a sign that investors reluctant to execute deals out of fear of a trade war are ready to get into the game.
Still, there’s much uncertainty about the deal, which President Trump is calling the United States-Mexico Trade Agreement. Uncertainty is what has kept the Tax Cuts and Jobs Act from putting the economy into an even higher gear.
{mosads}Some of the details emerging about the deal aren’t as positive as investors and business owners — and consumers — could have desired. The goal should have been freer trade with fewer trade barriers, as is the case with prohibiting tariffs on digital trade, but some provisions, particularly those relating to automakers and their suppliers, make it less so.
For example, the proposed agreement requires that 75 percent of the parts of automobiles be produced in the U.S. and Mexico to qualify for tariff-free treatment. Under NAFTA, the mandate has been 62.5 percent. That could both slow production, as companies build new infrastructure to make the parts, and drive up prices, as the parts currently coming from elsewhere are likely cheaper.
The deal also requires companies that make those parts pay 40-45 percent of their workforce a minimum of $16 per hour. This is to address a longtime concern — that automakers and suppliers were moving their production facilities to Mexico and elsewhere to take advantage of lower labor costs. Again, consumers will see the effect here, with higher prices.
This is important because auto sales are a big driver of our economy. Higher prices mean fewer sales. Already, auto sales are feeling the effect of higher interest rates — many car makers reported declines in their July sales.
“The annual percentage rate on financed new vehicles averaged 5.74 percent in July compared with 4.77 percent in July 2017,” Automotive News reports.
On the positive side, though, the new deal with Mexico preserves developments in the energy sector that have benefited the U.S. immensely.
Mexico had long maintained state control of its natural resources – including its coal, natural gas, and crude oil. In fact, the country had only one petroleum company — the 75-year-old state-run Pemex.
As is so often the case with government-created and government-run monopolies, Pemex had been plagued by corruption and inefficiency. Its engineers had little incentive — in fact, lots of disincentives — to run the risks inherent in exploration and innovation.
But in 2013, Mexican President Enrique Peña Nieto began to gradually privatize the energy sector. While his move was initially unpopular, the constitutional changes were firmly in place a year later, opening the gates for foreign investment in Mexico’s energy sector.
Texas and American petroleum companies were ready to step in with capital and know-how. The result has been a boom for both countries. Mexico is producing more crude oil, and selling it to us. And we, in turn, sell them gasoline and other refined products. This means more jobs at home and abroad, and more prosperity for all.
Mexico’s incoming president, Andres Manuel Lopez Obrador, has praised the new deal, saying it upholds Mexico’s sovereignty over its mineral resources, while allowing for the investment of private capital.
Lopez Obrador, more leftist than his predecessor, is expected to slow or stop new contracts with private firms, but says he will respect those already in place (which number more than 100).
This binding bilateral trade deal, should it be approved, might soon be the insurance American firms need to continue to operate in Mexico’s oil fields.
It’s now time to bring Canada into the equation. Canada is Americans’ second largest trade partner next to China. Talks have already resumed, and there are positive signs.
The focus should not just be on reducing trade deficits — trade is, after all, a voluntary agreement from which both sides benefit. It should be on making trade more free, not less. It should be on removing tariffs, which in reality are a tax on Americans. And the focus should be on making the U.S. more economically competitive like the passage of the Trump tax cuts last year.
If talks with Canada break down, then the uncertainty that has been a drag on our economy will remain — and that’s a net negative for American prosperity. However, if the final agreement includes Canada and reduces trade barriers, then this is a deal that will let people prosper.
Vance Ginn, Ph.D., (@VanceGinn) is the director of the Center for Economic Prosperity and a senior economist at the Texas Public Policy Foundation.