Trump’s NAFTA renegotiation

That is the topic of my latest Bloomberg column, the deal will be “good enough,” but the method costly.  Here is one excerpt:

At what price? Canadians and Canadian politicians now feel slighted, and it will be harder for Canada to support U.S. initiatives, especially those led by Trump, in the future. It may be a long time before Canada feels like an even vaguely equal partner again. In the meantime, the U.S. and Canada have ongoing dealings and negotiations concerning water rights, border and migration issues, intelligence sharing, terror prevention, and presenting a (relatively) united front against other foreign powers, including Russia in the Arctic. The marginal gains in trade just don’t seem worth the deterioration in the relationship.

And should Mexico really feel elevated by getting the first crack at the deal? Surely it must know that it might not be the favored party the next time around.

Do read the whole thing.  The best extraction of rent policy, of course, is simply to let Canada keep its gains from trade right now, but later demand larger concessions when it comes to Arctic policy, which will really matter.  That’s assuming nationalism, of course, as a kind of second best rejoinder.  I am more comfortable with the alternative position that the citizens in the other NAFTA member countries count for just as much as Americans.

Comments

"I am more comfortable with the alternative position that the citizens in the other NAFTA member countries count for just as much as Americans."

I am sure you are.

Thanks to Trump, socialism is now cool.

Calm down.

2. Do a search on the fictitious names database.

What's wrong with socialism? Capitalism has failed us.

Man, I really hope that you're a troll. In case you are not, take at look at Venezuela.

Socialism works pretty well. Look at Canada, Denmark, Norway, Sweden, Germany, Japan, and France, heck, China too. The USA has some good old time socialism in its own backyard (aka Alaska Citizens Dividend, Tennesee Valley Authority, Fannie Mae, Freddie Mac, too many others to list)

That seems like it would produce a sub-optimal result, if one party is represented by an agent who seeks to maximize total utility, and the other parties are represented by agents who seek to maximize the utility of their principals. Either all agents should seek to maximize total utility (in which case we don't need multiple agents or actual negotiation, just a benevolent dictator), or else each agent should represent its principal faithfully.

Trump is a socialist, so very true.
And old school hard hat socialist. His posters should be adorned with muscular factory workers wielding hammers.

Nope. Not even close.

You probably think "free trade" is actually "free."

You probably think that having laws against regulation is a form of regulation that should be abolished. The state must be free! Free to regulate! otherwise our national sovereignty (which is the same thing as freedom) is restricted!

You probably think Trump is your own personal messiah. Is this why you worship at his feet?

"Trump is a socialist, so very true."

I'm sure Obama and Trump are in the same Communist cell. Clearly they are kindred spirits.

"let Canada keep its gains from trade right now, but later demand larger concessions…"

Canada will gladly pay you on Tuesday for a hamburger today - J. Cowen Wimpy

Yeah, it's far from clear that being soft on Canada now leads to larger concessions later. It may be just the opposite.

I'm not a fan of Trump, but one thing he has shown so far is that fear of making other nations "feel slighted" is overrated. His style of...umm...diplomacy causes consternation among the elites, but it has not done any material harm, and in fact it may be a winning strategy.

I understand why you see it that way, but I think it's more a case if international norms being a tragedy of the commons. Short-term gains? Maybe. At what cost if we lose mutual trust and interests with our former allies?

My point, really, is that I'm skeptical about how much of a cost there really is.

Canada is going to act in their interests, whether we are "nice" or not (within reason--obviously there are really extreme things we could do that would change the relationship). An approach of collaborating and aiming for mutual good feelings on trade may not have long-term outcomes that are any different than Trump's confrontational approach.

One problem with the "long term relationship" theory is that Trump's actions are strongly associated with him personally, and he will be gone in two to six years. His counterpart Trudeau is likewise only going to be in office for a limited time. Is the fact that Trump slighted Canada in 2018 going to be at all relevant to foreign policy in 2025?

Note that I'm not really a Trump supporter. I dislike his style, and I favor free trade. But I do think his foreign policy seems to be working pretty well, in terms of achieving his goals.

You know, in this entire thread, there is sill no mention of Trump's policy concerning North Korea, and to what extent it has been a success for anyone but North Korea.

Which is kind of strange - vast amounts of hype, then nothing. Sort of like how TV shows used to be promoted at the start of season, with no one caring much when the show was removed from the schedule later.

One can safely assume that the North Koreans are still doing all the things Trump railed against, even if Trump is no longer making it an apparent prominent part of his foreign policy.

Sound and fury, signifying nothing - possibly Kim Jong Un read some Shakespeare between his basketball playing at the German language Liebefeld-Steinhölzli school.

I did actually mention this below. I don't see how it's a failure.

Trump gave up nothing of value and got a little in return.

Of course they are not getting rid of their nukes... Just like they did not when we have up much larger concessions under previous administrations.

Dann111; agreed.

"Being liked in international relations" - OVERRATED.

What is being accomplished here is about the same as what is accomplished by a dog peeing on the furniture. Since it seems we must live with the dog for a while more, best to see if we can get him to aim for the darker colored pieces so the stains won't be so noticeable.

Of course the dog will think job well done and dismissed the enraged people as deranged and irrational.

Leave TC alone. It's his blog and he can write what he wants.

You commenting again already after that embarrassing performance on the "gambling" thread? Talk about incontinence!

Good editorial by TC. Apparently the Mexico Fund (MXF) and the Mexican peso are both up in the last six weeks, so the latest Trump move is viewed as a win for Mexico (compared to the alternative).

I thought it was good, too.

Lots of markets up this week. How has Mexico performed versus US since Jan 20 (when 'Trade War' started).

Don't know the numbers for Mexico, but I know the US has outperformed China by about 20% and all global equities (cap weighted) by close to 15%.

US is up about 5% since Trade War began.

"The best extraction of rent policy, of course, is simply to let Canada keep its gains from trade right now, but later demand larger concessions when it comes to Arctic policy, which will really matter"

Or extract rents in both domains? They're Canadians dude, they (and their leader) will gladly get on their knees if you tell them to.

Anyone who negotiates knows that the best extraction of rent policy is to extract maximum rents all the time in every domain

So long as you can maximise rents without seeming to be too aggressive / maximising. If partners think your minimum position is always a 90%-10% split, they may revert to Best Alternative once in a while to re-establish a credible threat of non-agreement. That's rational. Trembling hand and all that.

Oh Canada. The U.S. attempted to conquer Canada but failed. At the beginning of the Revolutionary War, U.S. forces (colonial troops) marched all the way to Quebec before being repelled. In the War of 1812, John Bolton, I mean Pres. Madison, approved a three-pronged attack against Canada. Jefferson predicted victory over Canada to be "a mere matter of marching". Unfortunately (?), “[t]he USA was woefully unprepared.” “Plus, the logistical challenges of waging war on a distant frontier were daunting if not insuperable.” No, this wasn't Iraq. The problem was that too many militiamen had bone spurs, and refused to leave the United States. The whole Canadian campaign produced nothing but “disaster, defeat, disgrace, and ruin and death,” the Green-Mountain Farmer, a Vermont newspaper, reported in January 1813. The last of U.S. troops left Canada in 1814 after evacuating and blowing up Fort Erie. The U.S. and Canadian armies have not fought each other since and have become strong defense allies. Until the ignoramus Trump.

This time there's more on the table: control of arctic sea lanes and oil development for example. So there's a little more incentive for the US to see it through.

Trudeau hasn't helped either -- but maybe Canada's Deep State will remain helpful on the crucial non-trade issues TC cites.

You must not be familiar with war plan red.

https://en.wikipedia.org/wiki/War_Plan_Red

Or for that matter, 58 / 40 or fight.

I believe it was 54/40 or fight.

"I am more comfortable with the alternative position that the citizens in the other NAFTA member countries count for just as much as Americans."

We have a classic social choice problem though, how to aggregate the wishes of groups of people. If we use "one man, one vote", then 300M+ Americans are collectively much more important than ... what is it 35M? ... Canadians.

"One country, one vote" however seems even more unfair or unbalanced.

Ons state, two votes is what makes the Senate work (along with a longer term). Though originally, Senate membership was not connected to one man, one vote either.

You think the senate currently works?

"I am more comfortable with the alternative position that the citizens in the other NAFTA member countries count for just as much as Americans."

You'd make a terrible lawyer, agent or President. I want the guy I hired to represent my side. Not to be worried about how getting the best deal now might damage his future relationship with the lawyer on the other side.

Your analogy is offside - your lawyer would be doing you a favor by taking into account *your* future relationship with the "party on the other side* when giving you legal advice/representation.

I've got no problem with my lawyer giving me advice. I do have a problem with my lawyer failing to champion my side. Any lawyer that starts counciling me that the opposing side's case "counts for just as much as" my case does, would be promptly replaced.

Literally Hitler.

Starting with the mental model of international relations as adversarial combat requiring lawyers to battle each other in a zero-sum contest is both unhelpful and inaccurate.

International relations can be positive sum because trade is positive sum. However, the allotment of the gains of trade is zero sum, and that is what these issues are about.

How does the allotment of gains become 'zero sum,' if one assumes the gains are growing through time?

Of course the gains are a finite quantity, but 'zero sum' does not apply to a situation where both sides share gains. In contrast to the increase of one party necessarily means the decrease of another party. In other words, when the cake keeps expanding, you can keep cutting larger slices without anyone being required to take a smaller one.

Fairness of distribution of gain has nothing to do a zero sum framework, essentially.

Anon,

Think this is slightly mis-phrased. The game is positive sum, but yes, the division of that positive sum is highly contestable.

Matters get even more complicated if gains are not static over time. Once I have driven your high value-added manufacturers out of business with my subsidies and erected barriers to entry, I can relax the subsidy and enjoy my long-term rents.

These are 5000 page agreements. Do you think lawyers are not involved?

Trade is a reciprocal relationship. Skewing the trade agreement so that it so favors one side over the other guarantees its failure. I have negotiated many joint ventures with lawyers who don't get it, believing that the best deal is one that is skewed to his client. No, it isn't, because it guarantees failure of the joint venture. The best deal is one that is profitable for both sides for many years. Look at McMike's response to my comment above. That anybody could be so stupid as to write such a comment makes me fear for our country. And his comment reflects the attitude of many Americans.

" Skewing the trade agreement so that it so favors one side over the other guarantees its failure."

It's surprising to see you in agreement with President Trump.

More
After a cursory search, I've determined that no one has tweeted "Donglord Trump" since 2017. As such I invoke squatter's rights on the term. Prepare for content.

Jesus man, I was being sarcastic

How well did the Treaty of Versailles work out?

Trump is the master of hiring terrible lawyers, agents, and well, being a terrible President.

Doesn't the requirement to use auto labor paid over $16/hour say in North America. Doesn't that imply that the auto jobs shifted out of Mexico could just as well end up in Canada as in the US.

$16 per hour is still quite cheap.

I am more comfortable with the alternative position that the citizens in the other NAFTA member countries count for just as much as Americans.

Holy liberal leap-frogging loyalties, Batman!

Why stop with NAFTA countries? This gets pathological very quickly. And rest assured Mexico's elite didn't get where they are by caring about you.

+1000.

This is what drives me nuts about open borders advocates (e.g. Cowen, Caplan)- I'm good with considering everyone equal on a moral level, but we are not equal at all in terms of what our goals are, world-view, etc. It is pure foolishness for Americans to not favor Team America over Team Mexico or Team Canada.

Considering half of the country hates the other half, this "Team America" stuff is a load of hot air as far as I'm concerned. If the biggest Trump supporter goes over to Maxine Waters and says and does some nice things with her, then maybe. But until then, all smoke and mirrors.

In intra-EU politics, the smaller members have frequently banded together to offset their weakness in negotiating with larger members (especially France and Germany). It seems oddly short sighted to me that Mexico and Canada did not form a united front to prevent the US from dividing and conquering them bilaterally

Perhaps if Canadian politicians and officials had toned down their constant virtue signaling instead of trying to slight Trump at every turn they would have had an easier time negotiating with the US delegation. Guess this works both ways.

You mean face away from Trump and bend over with pants down so Trump can ramthem with his bat?

I can't figure out why Trump hates NAFTA when it's the kind of deal Trump wants for himself when it comes to the US: everyone else getting screwed

After Trump cutting NAFTA like deals with him the US, people refused to do any deals with Trump, forcing him to resort to being a loud mouth on TV.

If Mexico or Canada were making the profits Trump claims from NAFTA, all the illegal immigration would be US citizens going to Mexico and Canada.

that's what I thought, Freddo.

"the smaller members have frequently banded together to offset their weakness in negotiating with larger members "

Effectively NAFTA is not a trilateral deal. It's overwhelmingly about Imports and Exports from the US.

"Most of the increase came from U.S.-Mexico trade, which totaled $481.5 billion in 2015, and U.S.-Canada trade, which totaled $518.2 billion. Trade between Mexico and Canada, though by far the fastest-growing channel between 1993 and 2015, totaled just $34.3 billion."

https://www.investopedia.com/articles/economics/08/north-american-free-trade-agreement.asp

Canada feels like an even vaguely equal partner again

So here I thought 10>1 and it's 10=1

If the general media only grudgingly mentions it if at all, throws in a lot of caveats and can't find a way to employ the word "treason," I'll assume Trump is at least moving things in a positive direction.

The market's positive reaction seems to be that they can at least finish their vacations without that much feared "trade war" in avocados or whatever erupting over Labor Day weekend.

fuck off anon. You shit this blog up enough with your drivel.

"equal partner"?

Are the NY Yankees and their single A farm club "equal partners"?

Canada has a smaller GDP than either California [nearly 2X] or Texas or NY. Its 1/12 of the US gdp.

The NYC police department can field as many armed personnel as the Canadian Army [even including reserves].

Canada cannot afford to have a grudge against the US. They will get over any Trump snub.

The military comparison seems irrelevant. We’re going to burn down Ottawa to avenge....dairy protectionism?

I guess that’s only slightly dumber than invading Iraq and Afghanistan. So kudos?

Supply chains have been built to support industries. They cross borders.

The long run equilibrium is that supply chain nodes will be less likely to be located in the US, since there’s an increase in perceived political risk.

Why source in the US if you can source in Canada and not be hit with random tariffs?

Make the parts in Canada and ship them to Mexico for assembly. Tariff free.

No, but they are a very small country that trades heavily with a very large country next door. Their ability to dictate the terms of that trade is limited because they are very much not an equal partner.

Not even close.

Many comments here are focused too much on what benefits the US, as the bigger country, can immediately extract from Canada. Sure, the US can wallop its neighbor in any trade dispute. But as TC suggests, the long-term costs are probably not worth any short-term gains. A friendly, entirely cooperative Canada is better for US interests than a weaker, poorer Canada that has strategic incentives to seek allies elsewhere.

Sure, that's why Trump is offering Canada fair, mutually beneficial deals.

And you believed that?

I think the point is that the US would have to impose a really lop-sided settlement, 95%-5% sort of level of split, before Canada seriously considered Best Alternative to Agreement. The current split of gains is nowhere near that.

Being liked is overrated.

Logic may not be applicable here. I think Trump just likes bargaining and making deals. It doesn't matter if at the end everybody including Americans end up worse off. That's why he blows up existing agreements, so he can enjoy a round of bargaining games.

A lot of truth here. He also gets to put his name on it, even if it didn't need "fixing".

Correct. He's "working for the American people." Hes "fixing" a deal he called horrible and vowed to throw out.

Failing to negotiate at least something new with Mexico would have been his "read my lips, no new taxes."

He also tends to negotiate terrible deals if the recent spending bill, tax bill, and his foray into North Korea is any indication.

I love the tax deal! It's going to be sweet to me ...

How is the North Korea deal "terrible"? He didn't concede anything other than ceasing military exercises (which can be resumed at any time). Of course DPRK is not going to denuclearize, but they did release three American prisoners ahead of the visit, and they also agreed to return remains of American service men from the Korean War.

I do not like the way Trump has ignored human rights issues and praised a brutal dictator. But in terms of what has actually been agreed, it's hardly disastrous, and seems like a minor win. And that regime being less diplomatically isolated is also probably a win in itself, lowering the risk of catastrophic nuclear engagement.

No I am wondering why the text search for North Korea failed so miserably.

'But in terms of what has actually been agreed, it's hardly disastrous'

Well, if you don't care about North Korea continuing to build more nuclear weapons and improve its strategic rocket capabilities.

Which may be something the U.S. cannot stop, and only slow at best. Nonetheless, Trump proclaimed that he would end such North Korean behavior - and in the end, nothing has changed in terms of North Korea. Apart from the North Koreans picking up a propaganda victory (important in their terms at least, even if for the U.S. is not all that important).

'And that regime being less diplomatically isolated is also probably a win in itself'

Until Trump pursues his next Fox commentator inspired policy shift in this area.

Now, I am wondering why the first word is not 'Now.'

Their propaganda has no utility, but good point, we should bomb them.

"Well, if you don't care about North Korea continuing to build more nuclear weapons and improve its strategic rocket capabilities."

This kind of comment makes me embarrassed for your lack of awareness or integrity. They were going to do what they wanted with nukes regardless of what we did or didn't do. We don't have any solution for that, which is why no president has had a good solution for it.

North Korea got relaxed relations with the South, relaxed relations with China, improved trade with Russia, and America got .. ?

America got some photo-ops, for Trump.

That makes it all in net terms a much better deal for North Korea.

Trump left North Korea with bukkake kimchee on his face courtesy of Kim.

"He also tends to negotiate terrible deals if the recent spending bill, tax bill, and his foray into North Korea is any indication."

Don't forget the better, cheaper, replacement for Obamacare.

Obamacare is still there and in fact more popular than ever and beats Trump's tax laws by a wide mile, according to Fox News, of all people:

https://thehill.com/policy/healthcare/403235-fox-news-poll-obamacare-is-more-popular-than-gop-tax-law

Canada is a member of the Commonwealth of Nations, which encourages free trade among other members, has a potential relationship with the EU and is also a close neighbor of Russia, the only other country in the world larger than Canada. As a leader in supplying the US with oil, newsprint, lumber products, etc. the US would be pretty stupid to play games with trade between the two countries.

Because obviously newsprint, oil, and lumber cannot be cheaply put on ships from other places?

Be serious. Canada has a proportionately weaker hand here. It is rational to expect the gains to accrue mostly to the US.

So long as a cuck isn't negotiating.

The Dotard can't even negotiate a proper deal with a porn star.

It looks to me at first glance that the result of this deal, granted we probably don't have all the details, is to drive up the cost of cars made in North America.

Auto stocks have rallied with the rest of the market.

cars must have now 75% of value crated in NAFTA area, up from 62% before.

I read once about how transmissions were made in Germany and later imported to Mexico by Ford or BE for final assembly.

This change forces automakers to build more components in Mexico. Could also be seen as a shield for China.

Don't forget it will mean fewer US auto exports when you count the fact that they will get more expensive in foreign markets.

This is great. We should poll the American people: would you be willing to pay more for your car so that more guys can work in the auto industry, rather than in, say, construction? Which also may mean that you’re priced out of the housing market.

Whipsaw style negotiations are not unusual and are often effective.

I don’t quite understand the argument that the Trump changes to NAFTA are trivial but they do terrible damage to our relationship with Canada.

If the Canadians want to elect people like Trudeau, well hockey must cause a great deal of brain damage.

America and Canada will come to agreements that are mutually beneficial. That will be true regardless of nasty comments by Trudeau or Trump.

There is a far more interesting dynamic happening here.

Every source of information that Canadian politicians and high level bureaucrats, all talking to their American counterparts in the Democrat congress or the bureaucracy in Washington, and the US media are telling them that they needn't worry, Trump will be either gone or shackled after November.

So essentially Trudeau is betting the Ontario economy that he won't have to deal with Trump. And if it makes cars too expensive for consumers, so much the better. They can ride their bikes to work in January. Plus Ontario insulted him by voting in Conservatives, so they can go to hell. Trudeau's are famous for destroying the economy of provinces that they don't like.

The feedback loops of democratic decision makers have broken.

'are telling them that they needn't worry, Trump will be either gone or shackled after November'

Really? So Canadians don't read the Washington Post?

Or actually notice how little law making Trump engages in - while taking full advantage of how the American presidency has accumulated a large amount of power subject to the caprice of whoever is holding the office.

'The feedback loops of democratic decision makers have broken.'

I'm confident that the Canadian oil industry remains in the feedback loop of democratic decision makers, and equally confident that they have much better contacts with American Republicans than you seem to grant them.

"And if it makes cars too expensive for consumers, so much the better. They can ride their bikes to work in January."

Because all cars evaporate in December?

Where will the Canadians go? North?

Ah, the 40% of content at $16 is for US labor specifically.

That's quite an industrial policy you have there. And further evidence that tribes don't have beliefs, only positions of the moment.

Yes. A super-special $16 minimum wage for auto-workers only. All hail the dictatorship of the proletariat! Trump Uber Alles!

My native Canada wallows in an inferiority complex to the giant on its southern border. This manifests not merely in pressing its own interests doggedly but whinging all the while about how unfairly it is being treated, even though the terms of trade and existing restrictions vastly favor it.

Reminds me of when debtor nations, hat in hand for debt relief, resist IMF conditions for austerity with the sobbing appeal for "sovereignty."

Canada, at least under its current regime, has become like whining minority multimillionaires upset about how unfair the world is to them.

Seriously, what is 75% of a car? Is it based on # of parts, weight of parts, do screws and bolts count?

My Honda H-RV was assembled outside of Mexico City and seems to be just as high in quality as Hondas assembled elsewhere. Parts are sourced all over the place and I think this 'regulation' will be difficult to enforce.

As a Canadian I can tell you I feel a lot more than slighted and there will be negative consequences resulting from that. But the real damage to America will be the loss of trust with its other it was formerly aligned with.

"Some 40 to 45 percent of the content has to be made by workers earning at least $16 an hour"

How does it feel to have voted for a socialist, you fucking retards?

Was that directed at just Trump? Or both Trump and Obama?

I am more comfortable with the alternative position that the citizens in the other NAFTA member countries count for just as much as Americans.

I'd be more comfortable with the position that Americans who aren't auto workers count for just as much as those who are.

" I am more comfortable with the alternative position that the citizens in the other NAFTA member countries count for just as much as Americans."

If this were actually true, Tyler would not have supported the continuation of the punitive corporate taxation rates that made it difficult, if not impossible, for the rest of the world to enjoy the benefits of US manufacturing genius. June exports of industrial supplies and materials ($46.3 billion) were the highest on record. If you want to improve the quality of life of foreignors, you must support Trump and US manufacturing exports. There is no alternative.

Oh dear. Neither Tyler nor Balding nor a single commentator has got what is the situation with Canada. In this post much of what Tyler says is reasonable (all the loss of trust stuff), but he has Congress probably being "amenable" and Canada facing a "take it or leave it" offer. Hardly.

So GOP senators have made it clear that they will not vote for this deal unless Canada is on it. Also, because of Lopez Obrador is coming in on Dec. 1 and Congress demands a 90 day waiting period, that means Trump must get Canada in by this Friday or the deal is kaput. This gives Canada some leverage.

There is also the fact that if somehow the US and Mexico go ahead and have this deal without Canada and slap auto tariffs on Canada, it will create a major mess for the US auto industry given the deeply interconnected supply chains going both ways between the US and (mostly) Ontario, with most of that run by US companies, GM and Ford. This is why those companies have not supported protectionism of their industry in this round of trade wars. That was part of why Trump made sort of peace with the EU; his big threat was to impose auto tariffs on them, and the US auto companies were not supporting it at all. Basically nothing came out of that deal: EU buy a few more soybeans and maybe a version of the TTIP negotiations will restart next year, although presumably under a new name, just as the revived NAFTA will have to be renamed because "NAFTA" has "bad connotations.

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