The USMCA Isn’t A Great Deal, It Is A Protectionist Tax On Consumers
by Tony Wyman
If what you were hoping for
after President Trump threw out the North American Free Trade Agreement between the United States, Canada and Mexico was a real step forward towards freeing business from government intrusion, you will be sorely disappointed.
What we got, instead, is what we always get from big government politicians who believe more regulation is better regulation. Instead of being “the most important trade deal we’ve ever made, by far,“ as President Trump bombastically claimed after Canada signed the new deal, what we really got was a protectionist version of NAFTA.
What we didn’t get is two things:
First, we didn’t get a game-changing treaty that completely redesigned the agreement between the U.S., Canada and Mexico, as the president suggested.
Forbes writer John Brinkley, who writes about international trade, said this about President Trump’s claim about the agreement being the most vital in American history, “That is more than a little over the top. U.S., Mexican and Canadian negotiators made some significant changes, but the finished product is not a ‘new trade deal.’ It’s an updated NAFTA.”
An updated NAFTA without the free trade component. And that’s the second thing: we didn’t get a free trade agreement. We didn’t get a deal that reduced market barriers, eliminated government intrusion, stopped governments from tipping the scale in favor of preferred industry insiders over others, stopped them from propping up inefficient companies that can’t compete in the marketplace without help, or one that allowed consumers to decide winners and losers on their own.
Unlike NAFTA, the United States, Mexico, Canada Agreement doesn’t even pretend to be about free trade. In fact, it is the opposite of that. The USMCA is little more than a protectionist agreement between the three signatories.
As the Foundation for Economic Education (FEE) said, “Unlike NAFTA, this latest agreement makes no pretense to be about free trade (or even freer trade). It’s a protectionist agreement imposed by the U.S. on the other two countries.”
And the problem with protectionism is it always rewards the recipients of the protection at the expense of consumers. That is what will happen with USMCA. Let’s look at just one portion of the treaty to see how a provision can ultimately hurt consumers while also possibly failing to truly help the targeted beneficiary.
Mexican Auto Labor
Under the provisions of the USMCA, 40% of the value added to automobiles sold in the U.S., Canada and Mexico must come from plants where production workers earn $16 or more an hour. That wage is already below what workers in American and Canadian plants are making, but it is nearly three times what Mexican auto workers currently get paid.
In addition to that requirement, negotiators agreed to increase the percentage of North American parts used to make cars sold tariff-free in the three countries from 62.5% under NAFTA to 75% under the USMCA.
Obviously, the impact of these changes will drive up the cost of North American cars significantly. Fewer parts will come from countries where wages and other production costs are lower than they are in the United States and Canada. Mexican workers will also likely suffer as manufacturers of car parts will shift more production to American and Canadian plants to meet the new requirements.
If, to qualify for more business, Mexican managers decide to increase wages to meet the minimum wage established by the agreement, they will drive their costs up to the point where they lose a great deal of their competitiveness with other parts plants with whom they compete.
In the meantime, rising auto prices will likely cause consumers to delay replacing their aging vehicles. Higher prices will hit lower-income consumers the hardest – the very buyers already hit hard by the Fed’s decision to increase interest rates.
Consequentially, plants that produce entry-level and affordable low-cost economy models will see declining sales. As demand for those vehicles falls, the need for workers will also decrease, leading to layoffs and hiring freezes in both the plants that produce the cars and those that produce the parts from which these autos are built.
“The new regional value content requirements mean that automakers will not able to source parts as freely,” said Edmunds’ Senior Manager of Industry Analysis Ivan Drury, “so there will be added costs associated with vehicle manufacturing. And, given that new vehicle prices are already stretched to record highs, things could take an ugly turn for consumer wallets.”
The Morality of Free Trade
When politicians oppose free trade, as President Trump has during his time in office, what they are supporting is more than just a less-than-optimal economic outcome. They are supporting the coercive abuse of government power to artificially and immorally impact the market.
When, for example, the government purposely drives up the cost of an economy model automobile, it is forcing consumers to spend money on that car they otherwise would not have had to spend. That lost money, therefore, isn’t spent on other goods, used to pay down debts or saved to provide for the buyer’s future.
When government deliberately drives up costs to protect a segment of industry that can’t compete in a free market, it is, effectively, reducing the earned buying power of consumers.
The single mother with a limited income, therefore, finds herself unable to buy new school clothes for her children. The retiring worker can no longer afford to end his career at 65. The family living paycheck-to-paycheck has to tell their son they no longer have the money for him to play travel soccer. You can relate how this would affect your own personal or family budget situation.
Whereas it is easy to see how free trade sometimes results in pain and suffering when a factory closes because it can no longer compete, it is much harder to see the benefits free trade brings to the lives of millions of consumers. Because of this, it is easy for political demagogues to jump on the protectionist bandwagon and sell voters on a platform of protecting American interests by clamping down on foreign cheats.
But when we take the time to see how low-cost goods brought to America thanks to free trade have improved the lives of millions of ordinary people, it is clear that free trade has been a boon to this country.
Think about cell phones for a moment. If laws were passed requiring that all components of cell phones were made in America, the cost of these devices would skyrocket to the point where most people couldn’t afford them.
What would we lose if the number of Americans who have cell phones suddenly plummeted? How many jobs exist today because of affordable cell phones? How many businesses exist simply because cell phones, like computers, iPads and MP3 players, cost a fraction of what they did when they first came out?
When we artificially drive up the cost of a good, whether it is domestically produced or imported from overseas, we are driving down our purchasing power. Increasing costs weakens the market power of the consumer and strengthens the market power of the producer. Producers win and consumers lose when costs rise.
Artificial costs created by government intrusion in the free market are, essentially, taxes paid by consumers, taxes that stymie growth, suppress innovation and creativity and, over time, reduce job and wealth creation.
Remember this when President Trump tells you about his next “wonderful new trade deal” that replaces free market forces with government-sponsored protectionism.