Trump's New Nafta is a Proven Failure Already

Mish

Trump hailed new NAFTA as American job generator but it hasn't and won't create jobs.

USMCA, Trump's NAFTA replacement entered into force on July 1, 2020. 

Trump hailed USMCA and Nancy Pelosi signed off on the deal because both assumed production would shift to the US. 

However, rather than move plants to the US, Japan Auto Companies Will Triple Mexican Pay.

The US-Mexico-Canada Agreement requires 40% or more of parts for each passenger vehicle be manufactured by workers who are paid at least $16 per hour as a condition to make them tariff free in the region. Trump hailed that feature as a way to boost production in the U.S., which has a higher hourly rate than Mexico.

Trump's theory was that U.S. production would inevitably increase to meet the 40% requirement, but Japanese automakers, which had already positioned their production bases according to the old NAFTA regime, are not simply willing to pull up stakes and redeploy.

The cost of moving operations is too great so companies will raise pay in Mexico rather than move production to the US.

  •  Honda Motor-affiliated parts maker Keihin will raise the hourly wage of employees at a factory in Mexico to $16 triple the average rate of a parts factory in Mexico, but still cheaper than making a move. 
  • Auto component maker Piolax, will also raise the hourly wage at its Mexican plant to $16 within the year. The company is also installing robots to mitigate rising labor costs, President Yukihiko Shimazu said.
  • Toyota Motor, which built a new plant in Mexico in 2015, is not finding it easy to change plans either. If Toyota does not operate the factory, it cannot recover its investment.

U.S. research agency Center for Automotive Research estimates that 13% to 24% of all cars sold in the U.S. will be subject to tariffs. If automakers pass these costs on, prices will rise by $470 to $2,200.


The center also said U.S. car sales will drop by up to 1.3 million units annually due to the Trump administration's trade policy -- including sanctions on China. It estimates that 70,000 to 360,000 jobs will be lost, leading to a $6 billion to $30.4 billion reduction in gross domestic product.

Premature Cheering 

Nancy Pelosi and the AFL-CIO Cheer USMCA

I wrote about USMCA, the new Nafta replacement several times, most recently on December 10, 2019. In Apparent Victory for Trump, Pelosi Approves USMCA: Look Closer

Dramatically Worse

Nearly anything the AFL-CIO supports is, by definition, bad for US consumers.

Thus, if this deal really is a "dramatic improvement", I propose it is dramatically worse.

Trump Irony

Trump is bragging about USMCA. And most Trump supporters will see it that way.

But at best, the deal represents no significant changes.

Importantly, the more the AFL-CIO and Pelosi are right, the worse Trump's deal is in practice.

Art of the Bad Deal

Previously I thought USMCA was much ado about nothing. I was wrong. Trump messed things up. 

Instead of moving auto jobs to the US, Trump's deal increased the price of cars and reduced US production.  

This is what happens when you mess with global production chains and you have no idea what you are doing.

Trade deals are generally win-win. But Trump demanded provisions specifically designed (or so he thought) to give the US a better deal. 

Mexico went along with Trump's demands because it correctly thought otherwise.

Right out of the gate it is clear Trump made matters better for Mexico and worse for the US, precisely the opposite of what USMCA was supposed to accomplish.

Mish

Comments (38)
No. 1-18
ToInfinityandBeyond
ToInfinityandBeyond

Even if Trump was successful I would hardly consider bringing back $16 an hour jobs to the good old US of A a great win for American workers.

Zardoz
Zardoz

Who needs jobs when he sends us checks? He's proven repeatedly he'll abuse brown people and liberals on our behalf. That's good enough.

Bungalow Bill
Bungalow Bill

Who knew that paying Mexicans three times as much is still cheaper than paying American union members their salary and their benefits! Trump sure didn't think this one through. Is anyone surprised by this story?

medianline
medianline

Kind of ironic that you concentrate on foreign car manufacturers to make your argument.

Misgivings
Misgivings

Well of course they're going to raise salaries right away. What else are they going to do they're not going to shut down a plant immediately and move it. What kind of logic is that?

Tony Bennett
Tony Bennett

"Trump's theory was that U.S. production would inevitably increase to meet the 40% requirement, but Japanese automakers, which had already positioned their production bases according to the old NAFTA regime, are not simply willing to pull up stakes and redeploy."

...

Yeah, right.

Anyone with a hint of real world awareness knows that any CEO with a pulse is deploying capital to increase stock price via dividend / buyback. A quick perusal reveals Toyota and Honda last November announced buybacks ... $1.8 billion for Toyota and just shy of $ billion for Honda.

Trump should be happy. It makes the only index he cares about rise.

tokidoki
tokidoki

Nothing matters except Dow 1 million.

Also, who says it's a failure? Less jobs mean more profits to Corporate America.

Six000mileyear
Six000mileyear

With better economic opportunities in Mexico, they better be prepared for a surge in illegal immigration from the US.

Webej
Webej

Seems like there should be some overjoyed Mexican automotive workers.
Imagine getting a 300% raise.

ToInfinityandBeyond
ToInfinityandBeyond

Stable genius my ass.

Tony Bennett
Tony Bennett

Black Knight out with full May report today.

A few nuggets:

"Mortgage rates fell to a record low of 3.13% on June 18 according to Freddie Mac’s Primary Mortgage Market Survey (PMMS)"

"While active forbearance volumes grew throughout the month, the share of those homeowners who remitted their May payments fell from 46% in April to approximately 30% in May"

"Black Knight's McDash Flash Payment Tracker shows that, as of June 23, only 22% of those in forbearance had remitted their June mortgage payments"

Captain Ahab
Captain Ahab

Japanese companies make cars in Mexico because it is cheaper than making them in the USA or Japan. To stop this, either DRAMATICALLY reduce the cost of labor in the US or increase the cost of labor elsewhere. Or give the f*^k up and accept the social upheaval that goes along with mass unemployment in the US, because in global markets that is what will happen given the current workforce!

At the end of the day, this is not about $16/hr jobs, but a complete restructuring of the economic base of the country to be competitive in the global arena. Given the last 40 years, my hopes are not high.

JonSellers
JonSellers

It is not just about the money and factory investment, its about the skills. Mexico has been producing cars for the US for a long time, and they have clustered automotive production in just a few towns. That has created a cluster of highly-skilled automotive workers. The US no longer has those kinds of skills outside of a couple of cities in Michigan. And, frankly, why would you put a factory in unionized Michigan when you can get high quality, non-union workers elsewhere?

Casual_Observer
Casual_Observer

This will quicken the road to bankruptcy just like the Art of the Deal did for Trump.

channelstuffing
channelstuffing

Got a Mexican making $1.75 hr assembling $60,000 pickups using Chinese parts,drive it across the border,mark it up 400% and sell it to Gringos at 10%APR!
Why mess with that Scam?

Stuki
Stuki

The land of Dear Leader picking winners, five year planning, competence at nothing aside from stealing from, and harassing, it's own citizenry, and waving of flags!

Realist
Realist

The new Nafta isn’t too much different from the old; just a few tweaks here and there. I would not consider it a failure if it promotes trade between the 3 countries, which I believe it does. It has taken a very old agreement and made it more up-to-date.

Where it is a failure, is in the eyes of those who believed what Trump was selling to Americans; he was going to WIN more jobs and business for America, while sticking it to Mexico and Canada.

Spoiler alert; Mexico and Canada would never sign a trade agreement that hurt their economies in order to benefit the US. No country would.

Like all trade agreements, there will be minor wins and minor losses for every party. But all three must end up as winners overall, or they wouldn’t sign it.

So Mexican auto workers get a raise. Good for them. It’s nice to see the little guy get a break.

My big concern is that Trump will renege on the agreement. He is already talking about new tariffs on aluminum from Canada. I guess he wants to buy aluminum from his buddy Putin instead. The US imports 2/3 of it’s aluminum and I guess Trump would prefer to buy from Russia.

I suspect he will put new tariffs on Mexico as well if he figures they got some kind of benefit from the new deal.


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