U.S. President Donald Trump has managed to strike a deal with Canada and Mexico to reform the 1994 Nafta agreement, with several new provisions he will count as important achievements, as the U.S. attempts to reduce its trade deficit with the rest of the world.
- Provision 1 – For cross-border transportation of automobiles to be duty-free between the three nations, each vehicle will have to be 75% made in North America (previously this was set at 62.5%).
- Provision 2 – For automobiles produced in the U.S., Canada or Mexico, at least 70% of the steel and aluminium must be sourced from one or more of the Nafta countries.
Both these amendments will make it much more difficult for American, Canadian and Mexican auto manufacturers to source raw materials from China.
This is a serious accomplishment for Trump, who cited a reworking of the Nafta deal as a priority before taking office in 2017 when he described the trilateral agreement as being “the single worst trade deal ever approved in this country”.
With midterm elections scheduled for early November, it’s clear that the new deal gives Trump’s supporters something to rally behind. However, there is a broader goal driving the U.S. President’s trade policy.
The United States imports much more than it exports, and this has resulted in a huge trade deficit. Trump aims to reverse that by striking favourable, bilateral deals with the U.S.’s trading partners around the world.
Trump views the trade practices of other countries as “unfair” to the U.S., and this perceived unfairness has been the motivating factor in many of his recent initiatives, from stepping away from the Trans-Pacific Partnership to imposing new tariffs on a wide range of Chinese imports.
Will Trump’s Strategy Work?
It’s too early to tell. Trump’s proposals have yet to be rubber-stamped by Congress and, even when they are, it will take years before the provisions are implemented.
Although Trump’s proposed solution to “unfair” trade practices seem sensible in principle, most economists disagree.
According to a recent report from the Congressional Research Service (CRS), “the Trump Administration’s approach contrasts with the views of most economists, who argue that the overall U.S. trade deficit stems from U.S. macroeconomic policies that create a savings and investment imbalance in which domestic sources of capital are not sufficient to meet domestic capital demands.”
In other words, the United Stated invests more than it saves.
A country can save less (or spend more) if its government either lowers taxes or increases private sector spending. If there is no increase in spending to offset reduced tax revenues, the trade deficit will tend to widen.
To put it another way: if citizens of a country have more disposable income (because that income it is taxed at a lower rate), they will spend at least some of it on imports.
Trump has slashed taxes on personal incomes and company profits and has proposed to increase government borrowing, believing that doing so will boost economic growth to such an extent that overall tax revenues will increase.
So, if Trump does go ahead with his plans to increase government borrowing, it is likely to undo his assertive approach to trade policy and actually increase the U.S. trade deficit even further.
This article is for educational and informative purposes only and should not be considered as investment or trading advice.