AS FAR back as the campaign trail, President Donald Trump had promised to renegotiate or rip up the North American Free Trade Agreement (NAFTA). But Paul Ryan, the Speaker of the House of Representatives, has said that if this Congress is to have time to approve a new version, it needs word that a deal is going ahead by May 17th. As The Economist went to press, that deadline seemed unlikely to be met.
Negotiations seemed to stall on May 11th over rules relating to carmaking. After a brief meeting between ministers, and despite reports that momentum has been building in recent weeks, wide differences remained. Representatives of the Mexican car industry had planned to return to Washington on May 14th to resume talks, but were told by their government not to bother.
The impasse is over “rules of origin”, which must be satisfied if a car is to qualify for tariff-free export within the trade bloc. Such rules normally set minimum requirements for the share made locally: as NAFTA stands, 62.5% of a car’s manufacture must be inside the bloc. American negotiators want to add a novel twist: that at least 30% of the content must be made by workers earning more than the North American median for the industry. The intention is to address a longstanding criticism of NAFTA in America, namely that it has harmed American workers. Although the overall impact of NAFTA on the country’s labour market has been negligible, there is some evidence of localised downward pressure on wages among blue-collar workers.
In the 1940s and 1950s, when the world trading system was being built, policymakers fretted about this sort of race to the bottom. But during the next decades a consensus emerged that international labour standards should be framed in terms of rights, such as the freedom of association, rather than wages. Some of the strongest resistance to setting minimum-pay rates came from developing countries, which suspected a ploy to remove their main comparative advantage. Modern trade deals do not, therefore, focus on wage levels. The Trans-Pacific Partnership, which Mr Trump pulled America out of shortly after taking office, simply stated that members would have a national minimum wage, leaving each to decide what it should be. Writing a link between a car’s rules of origin and a wage level into NAFTA would be a first.
The Trump administration hopes it will reshape production chains in favour of American workers. In America the sector’s median wage in 2017 was around $16 an hour in the south-east and $18 an hour in the west, according to Raymond Robertson of Texas A&M University (see chart). Using household-survey data, he estimates that in Mexico, if informal workers are included, it may be as little as $2. Carmakers there will face a choice if they want to continue benefiting from NAFTA’s duty-free treatment. Either they can raise wages in Mexico, or move some production to America (or Canada).
But if the cost of meeting the new rules is too high, then companies are likely to spurn the agreement altogether, and swallow non-NAFTA tariffs of 2.5%. Ann Wilson of the American Motor and Equipment Manufacturers Association reports her members’ concerns about an entirely new administrative burden. When shipping parts between Mexico and America, they have never had to keep track of wages in the way such a rule would require. It is unclear which workers will count and how the wage threshold will be kept up-to-date.
Indeed, some suppliers are already planning to avoid the headache and pay the tariff. According to the Centre for Automotive Research, if the proposed rule was already in force many of the cars currently sold in America would fall foul of it. If car producers passed on the extra tariffs to consumers, the prices of affected cars could rise by anything from $470 to $2,200. Those who give up trying to meet the new rules may then look beyond North America for car parts, as Mexican ones would be pitted against those from Asia. Even now China accounts for the same share, 31%, of brake systems imported to America as Mexico does.
Squeals from the car industry may sound to the Trump administration like proof that their plan to reshape it will work. Mr Robertson says that the proposed rules could perhaps shift “a little bit” of money from bosses to American workers. But it could also shrink the total there is to go around.