This month’s business cycle blog will focus on the latest status of Trump’s trade war and its effect on the economy. Of special note is the new trade agreement between the United States, Mexico, and Canada, called the USMCA, for the United States-Mexico-Canada Agreement. This new agreement replaces the North America Free Trade Agreement, or NAFTA, and it will be in place as soon as the US Congress and the Canadian and Mexican legislatures approve it (expected by 2020).
The USMCA covers agreements on autos, dairy, pharmaceuticals, intellectual property (IP), and environmental and labor regulations. On cars, the new provisions require 75% of its components to be manufactured in North America to qualify for zero tariffs (up from 62.5%). On milk, US dairy farmers will gain more access to Canadian markets and “Class 7” products (concentrate, powder, and formula). US pharmaceuticals will enjoy 10 years of generic protection (up from 8), and stronger protection for patents and trademarks.
The irony in all this is that this will not help provide additional manufacturing jobs in the Midwest, a key area of support for President Trump in the 2016 election. There are multiple reasons for this effect. One of the reasons, is the agreement itself, which requires higher salaries for the employees in all three countries (minimum $16 per hour rate). Salaries at this rate will prohibit building smaller/economy cars from being cost effective, which will either force higher prices, or divert manufacturing these cars to places like Asia. Another reason for lost higher paying manufacturing jobs has nothing to do with trade, and has everything to do with one word – automation.
Finally, there are always two sides in any trade partnership. Our current partnership with China has been going back and forth in a tit-for-tat action and reaction. China’s reaction to Trump’s tariffs has been to strike back at his political base, by putting tariffs on motorcycles, whiskey, cranberries, soybeans, and pork – key “red state” products. Trump’s latest act was to pull the US out of a 144-year old postal treaty. This treaty comprised of 192 countries agreeing to international postal rates for products and letters shipped between countries. Trump’s administration argued that the treaty allowed China to ship products to the US at rates lower than some domestic shipping rates. What will China do next?