Trump's NAFTA replacement may help labor – but hurt business and the economy

  • In theory, President Trump's agreement with Mexico gives you a better trade deal than NAFTA – if you're a pro-labor liberal, that is, and not an executive, investor or consumer.
  • The "in theory" part matters a lot. The Mexico agreement is only preliminary, Canada hasn't signed on, and experts say key differences with NAFTA may not work as advertised.
  • But from the few details that have emerged, there are differences. They're designed to benefit far different people than his tax cut did.
President Donald Trump talks via speakerphone to Mexican President Enrique Pena Nieto to announce a deal to replace the North American Free Trade Agreement (NAFTA) at the White House in Washington, August 27, 2018.
Kevin Lamarque | Reuters
President Donald Trump talks via speakerphone to Mexican President Enrique Pena Nieto to announce a deal to replace the North American Free Trade Agreement (NAFTA) at the White House in Washington, August 27, 2018.

In theory, President Donald Trump's agreement with Mexico gives you a better trade deal than NAFTA – if you're a pro-labor liberal, that is, and not an executive, investor or consumer.

The "in theory" part matters a lot. The Mexico agreement is only preliminary, Canada hasn't signed on, and experts say key differences with NAFTA may not work as advertised.

But from the few details that have emerged, there are differences. They're designed to benefit far different people than his tax cut did.

Those heartened by the deal identify two main provisions. One sets rules for auto manufacturing; the other alters rules for settling disputes between investors and governments.

The dispute settlement changes make it harder for investors to sue for damages over actions by member governments. Union leaders and environmentalists insist those provisions under NAFTA, intended to protect businesses from arbitrary political decisions, have become tools for investors to undercut labor and environmental standards.

The auto provisions would require that, to avoid import tariffs, 40 percent of new cars be made by workers earning at least $16 an hour, and that 75 percent of their value be manufactured in North America. NAFTA required that 62.5 percent of new cars be made in member countries.

The goal of higher U.S.-Mexico content requirements is more domestic auto-manufacturing jobs. The goal of wage requirements is boosting pay for Mexican workers, and thus easing downward wage pressure on U.S. workers who make more than that already.

That would be good news for the "forgotten" blue-collar workers Trump courted in 2016 – and for populist Democratic firebrands like Elizabeth Warren whom Republicans love to hate.

"It's easier to compete against workers being paid $16 an hour than $4," said Jared Bernstein, who was considered the most liberal member of President Barack Obama's economic team. "This one looks to go a lot further toward helping workers on both sides of the borders."

Not so for auto buyers. The higher manufacturing costs resulting from higher-paid workers would also mean higher auto prices. If they didn't, Bernstein noted, the pro-labor provisions wouldn't be working.

Of course, that's one of many big "ifs."

As with Trump's phantom nuclear deal with North Korea, the White House hasn't produced details to back up his salesmanship. Mexico, like American businesses and Republican congressional leaders, wants a three-country deal for NAFTA 2.0 rather than just the U.S.-Mexico deal Trump suggests.

Hastily joining talks this week, Canada has signaled it may embrace the new framework. But ratification by Congress won't be easy, especially if Democrats recapture the House in November.

Even if Congress goes along, manufacturers could respond to higher labor costs with increased use of automation. To dodge the cost of reconfiguring supply chains, they could ignore higher North American content requirements and just pay the existing 2.5 percent auto important tariffs. They could shift more manufacturing overseas, where demand for autos is growing.

"NAFTA 2.0 should have been focused on REDUCING costs and further allowing our supply chains to become even more efficient, increasing the global competitiveness of North American producers," tweeted Tony Fratto, who worked in President George W. Bush's Treasury and White House. "But it will now go in the opposite direction. The end result is that in the coming years more and more vehicles will be produced and sold outside the U.S."

Other elements of the new framework, such as updated provisions for the digital economy that was just being born when NAFTA was enacted, are less controversial. They were also sitting on Trump's desk when he became president, negotiated already by the Obama administration as part of the Trans-Pacific Partnership he promptly scuttled.

As a result, the new framework has few fans outside of the Oval Office and the populist left. Mainstream economic and trade officials from past White Houses — from Democrat Austan Goolsbee to Republicans Carla Hills and Doug Holtz-Eakin — tell me the Trump administration spent months negotiating something that represents a step backward for the American economy.

"What's new in the agreement is not good," concluded Jim Bacchus, a longtime trade official elected to Congress as a Democrat during the Clinton era. "A move away from free trade and toward managed trade. It's the opposite of what we should be doing."

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