The Trump administration’s attitude toward international trade is difficult to pin down. President Donald Trump was unwilling to continue negotiating the Trans-Pacific Partnership, and he withdrew the United States from the negotiations three days into his presidency. Yet he agreed to renegotiate the North American Free Trade Agreement, a trade pact that he characterized in his presidential campaign as the worst trade deal in the history of the United States. This despite the fact that the TPP promised the United States much of what it seems to be seeking in a renegotiated NAFTA.
But while the Trump administration’s overall trade strategy is muddled, the negotiating tactics of his trade advisers are much clearer. The tactics can be characterized as “segment” and “bully.”
The segment tactic is clear in the administration’s explicit preference for bilateral trade negotiations at the expense of regional (NAFTA), plurilateral (TPP) or multilateral (World Trade Organization) negotiations. In October, U.S. trade representative Robert Lighthizer warned that while the United States would aim to preserve NAFTA’s structure, some parts of the deal would be hashed out bilaterally.
We also see the “bully” tactic when negotiators use access to the U.S. domestic market as a bargaining weapon to extract concessions from our trading partners. In November, Commerce Secretary Wilbur Ross defended the Trump administration’s hardball strategy for renegotiating the NAFTA suggesting that the United States can pressure Mexico and Canada because they have more to lose if the pact collapses.
The tactics of segmenting and bullying can be linked by a certain, albeit flawed, logic.
While it may be easier to bully a single trade partner than multiple partners, multi-country trade deals offer larger economic benefits to the United States than bilateral deals. Integrated and efficient North American supply chains in industries from motor vehicles to electronics illustrate the benefits of linking producers from all three NAFTA countries in a free trade area, rather than balkanizing North America into, at best, two separate bilateral trade regimes.
This multi-country free trade structure under NAFTA reduces transaction costs of doing international business and translates into savings for consumers. Consumers everywhere are unequivocal beneficiaries of the improved efficiency and tariff-free trade that comes with increased geographical cooperation. But unfortunately, consumers seem to be the “forgotten men and women” of the Trump administration’s trade policies.
The notion that the United States has a weighty upper hand in the NAFTA negotiations is also flawed. Though it may seem we hold all the trump cards (pun intended), this attitude could be a tactical error by U.S. negotiators.
For example, if we look only at export shares, one might agree with Ross that the United States enjoys a dominant bargaining position. In 2016, the United States was the destination for around 76 percent of Canada’s merchandise exports and around 81 percent of Mexico’s merchandise exports. By comparison, Canada was the destination for around 19 percent of U.S. exports in that year, while Mexico accounted for about 16 percent of U.S. exports.
However, the main problem with focusing on percentages of exports is that it obscures the fact that trade flows across the three NAFTA partners is much more “balanced” when expressed in absolute values. For example, in 2016 Canada exported $296 billion worth of goods to the United States, while U.S. merchandise exports to Canada totaled $267 billion. Mexico exported $302 billion of goods to the United States, while the United States exported $230 billion to Mexico.
Those figures highlight the reality that if the United States were to pull out of NAFTA and – in the extreme – catalyzed an all-out trade war with our North American allies, U.S. exporters would need to find new markets for their products comparable in dollar value to the new markets that Canadian and Mexican exporters would need to find. And to top it off, a major difference between Canada and Mexico on the one hand and the U.S. on the other is that the two smaller NAFTA countries are actively seeking free trade agreements with countries in the fast-growing Asia-Pacific region. In fact, both Canada and Mexico are involved in the group that is continuing the TPP negotiations. The United States is not.
In sum, it is not completely certain that the United States can pressure Mexico and Canada into big concessions because they have more to lose if NAFTA collapses, as Ross seems to believe. What is more far more likely is a complete failure in negotiations if the United States continues its hard-headed bargaining stance. Furthermore, the behavior of the United States in the NAFTA negotiations, if continued, will make the United States a less desirable trade negotiation partner in the eyes of other countries.
Time is running out for the U.S. government to exhibit more clarity and good judgment in dealing with its NAFTA trading partners. Hopefully in this next round of negotiations, rather than pushing for politically fraught trade concessions from Canada and Mexico, U.S. trade negotiators will better serve the interests of Americans by adopting the view that helping trade partners become more prosperous makes Americans wealthier, not poorer.
Dr. Steven Globerman is the Kaiser professor of International Business and director of the Center for International Business at Western Washington University.
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