Two changes could pave the way for the USMCA trade agreement
It has been a tumultuous time for North American commercial relations. For too long, President Trump has misled the public about the supposed failures of the North American Free Trade Agreement, sowing uncertainty and doubt about the future of the trading relationship. The next few months will be crucial to repair that damage. Two policy changes could help deliver much-needed certainty and grease the skids for NAFTA’s replacement, the United States-Mexico-Canada Agreement.
First, the United States needs to lift the dubious “national security” tariffs it levied on Mexico and Canadian steel and aluminum imports. Doing so would be savvy politics and policy. Rep. Kevin Brady, R-Texas, the ranking member on the House Ways and Means Committee, which has jurisdiction over trade policy, recently said Congress will not pass the USMCA as long as the steel and aluminum tariffs on Mexican and Canadian imports remain in place. Echoing Brady, Senate Finance Committee Chairman Chuck Grassley, R-Iowa, suggested after meeting with the respective foreign ministers that neither Canada nor Mexico will move forward to ratify USMCA as long as the tariffs remain in place.
The steel and aluminum tariffs have been misguided policy all along. The U.S. military’s steel and aluminum needs amount to only about 3 percent of domestic production. Not only does the Pentagon not rely on imported steel and aluminum, but Mexico and Canada are longstanding allies who pose no national security threat to the United States. Moreover, the tariffs have raised costs on consumers and failed to revive the steel and aluminum industries. As Benn Steil of the Council on Foreign Relations noted in a recent blog post, the steel industry has taken a nosedive over the past year since the tariffs were announced. The only winner here has been steel industry lobbyists. According to a recent Wall Street Journal story, steel lobbying expenditures topped $12 million in 2018, up considerably from the past two years.
Meanwhile, north of the border, the Province of Alberta recently announced significant cuts to its crude oil production in order to combat the supposed scourge of low prices. The cuts coincided with Saudi Arabia’s production cuts at the end of 2018. Canada supplied about 40 percent of U.S. imported oil in 2017. This decision will put upward pressure on prices and further jeopardize North American commercial relations. There are already signs the plan is backfiring.
The initial plan to cut production by 325,000 barrels a day beginning in January was meant to clear a glut of excess oil. Officials recently lowered the mandated reduction by 75,000 barrels a day, to 250,000, after complaints by Alberta oil producers. To date, inventories have fallen by about 5 million barrels. As oil prices have skyrocketed, oil shipments in Canada have precipitously declined in recent weeks. It is simply becoming too expensive to ship Alberta’s oil right now.
Though the Alberta government’s decision to permit more production was a step in the right direction, more needs to be done. North American firms are dependent on stable and predictable supplies of oil. This issue could become a point of contention as policymakers across North America look to finalize the USMCA. Unnecessary commercial tensions will only stand in the way of progress.
Despite being a target for misleading rhetoric and unnecessary threats from politicians, NAFTA has been a tremendous success. Since NAFTA’s inception, tariffs, and other barriers have fallen across North America and trade volumes have increased. The pact has integrated the economies and served as a bulwark for stability. Mexico and Canada are important allies and our commercial relationships are an integral part of that alliance. We can provide additional certainty to this relationship, but policymakers in the U.S. and Canada need to address some outstanding issues before the USMCA will become reality.
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