Why Trump wants to rip up his own trade deal

0:01NPR.

0:06This is The Indicator from Planet Money. I'm Adrian Ma. And I'm Darian Woods. Six years ago, President Trump signed a trilateral trade pact called the U.S.-Mexico-Canada Agreement, or USMCA. Well, if you're in Canada, you call it the C-U-S-M-A, CUSMA. Or in Mexico, it's called Tratado Mexico Estados Unidos Canada. Sounds like bad bunny at the end of the Super Bowl. Three names, and you know what's funny? The word trade doesn't appear at all. President Trump was a driving force behind this agreement. So when he signed it in 2020, he was pretty proud of it. The USMCA is the largest, fairest, most balanced and modern trade agreement ever achieved.

0:45So if that's how Trump felt back then, why, just days ago, did he say this to reporters? We do better as a country if we don't have an agreement. So are you thinking of... Yeah, I'm thinking about maybe we won't be able to make a deal. I would rather not have the USMCA.

1:00Sierra Juarez:The timing of this shift isn't coincidental. That's because today, July 1st, the three countries are getting together to decide whether or not to continue the USMCA. Today on the show, we'll explain why and what happens if they can't make a deal.

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2:30Sierra Juarez:Before the USMCA, there was NAFTA, the North American Free Trade Agreement. It went into effect in 1994 and tore down trade barriers between the US, Mexico and Canada. And in the years that followed, there was a boom in trade in everything from crops and metals to electronics and cars. Goods flowed across borders like never before. And unfortunately, so did a lot of American manufacturing jobs. And this is partly why President Trump during his first term called NAFTA a lousy deal, why he pushed Mexico and Canada to renegotiate, and how we got the USMCA. In some ways, the USMCA is just a souped up version of NAFTA.

3:11Sierra Juarez:It didn't so much reinvent bent the wheel, as put some air in the tires and add some rims. For example, USMCA tweaked policies that said how much of a literal car should be made in North America in order to qualify for tariff-free treatment. It also had a news section covering e-commerce. But maybe the biggest structural change from NAFTA was the introduction of a sunset clause. Yeah, a sunset clause. Think of it like a sell-by date on a jar of pickles. You could still eat it, but the countdown to expiration has begun. And the USMCA's sell-by date is July 1st, 2026. So what happens now? For some answers, we called up Barry Appleton.

3:52Sierra Juarez:He's an international trade expert who teaches at New York Law School. Barry says the US, Mexico, and Canada basically have three options. Option A, they can decide to lock in the current agreement for 16 years. Everyone can play nice, okay? And we're going to share the playground and the sandbox, okay? So that's just, you leave everything the way it is. If they don't extend the deal, there's option B. It's not like the agreement falls off a cliff. Really, it's more like a very long down escalator. So every year there's a review until everybody's happy, which means the U.S. And that puts political uncertainty and pressure onto the other parties.

4:32Sierra Juarez:If in 10 years there is still no deal, then the USMCA expires. But Trump seems to have soured on this deal that he himself championed just six years ago. And Barry has a theory as to why, why the US is likely to favor option B. And that's because it gives the US a chance to extract more favorable terms of trade from Canada and Mexico. The administration sees this as a win. They see more leverage. Someone's going to have to give them a deal. Because if they don't, there's still option C. With six months' notice, any party can withdraw from the USMCA. And while Trump has said he might still sign an agreement, he's also said he'd, quote, rather have it terminated, unquote.

5:15So how is this playing out with the US's trade partners? As someone who's previously advised Canadian officials on trade issues, Barry says the Canadians still seem kind of dumbstruck that they're even in this situation. Well, Canada is spending its time feeling like the aggrieved spouse going to marital therapy. And it's a bad strategy. Because unless both sides want to get help, that doesn't work. So their strategy is, we all love each other. We've been your best partners. We're going to grow the pie. And nobody's listening to that. That counts right now. By the way, I agree with what they're saying.

5:52It's just it's the wrong strategy for this game. For the game Barry thinks Trump is playing anyway. This is not a strategy about joint economic benefit and development. This is a strategy about power redeployment. It's really about who controls the playground and how it works. And some kids want to bully the other kids. And you've got to decide, what are you prepared to live with?

6:13Sierra Juarez:Are you saying the U.S. is the playground bully here trying to shake down Canada for its lunch money? Yeah. Is America the bully in this playground? For sure. And are they taking the lunch money? Yeah. They're taking the lunch money. They're taking the recessed snack. They're taking my lunchbox and everything else I can get to, and they're kicking some sand in my face at the same time. Okay, and to put it in international trade terms, Barry says the Canadians may have to concede ground on some of the U.S.'s concerns on things like Canada's protectionist policies on dairy products, its decision to import Chinese electric vehicles, and what percentage of auto parts should be made in the U.S.

6:52Given that about three quarters of Canadian goods go to their neighbor to the south, they can't afford to make America mad.

7:00Sierra Juarez:Now, unlike Canada, Mexico has been trying to play ball and has engaged in direct negotiations with the U.S. ahead of the July 1st deadline. But Mexico would also just prefer to extend the USMCA. Antonio Ortiz-Mena is a professor at Georgetown University who specializes in U.S.-Mexico trade relations. And he was also on the Mexican negotiation team for NAFTA back in the 90s. He says the current agreement was a much-needed modernization of NAFTA. I would say because it's much more comprehensive, and the economy that we had in 1990 is very different from the current economy. While NAFTA was focused on goods, the USMCA added more provisions covering things like financial services and telecommunications.

7:48And trade and services have become much more important than they were in 1990. And the fact that they're incorporated in a more comprehensive way, I think, is positive.

7:59Sierra Juarez:He also says the USMCA included a new mechanism for countries to settle disputes, which is good for a relatively smaller economy like Mexico's. If you just use market power, it's difficult to negotiate with the US. But if you use legal arguments, it's more of a level playing field. Of course, the Trump administration has not limited itself to these sorts of dispute resolution mechanisms, to say the least. During the past year and a half, President Trump's trade war with the world has included Canada and Mexico. And while the USMCA shielded most of those countries' exports from tariffs in the US, a lot of goods weren't covered.

8:36So, for example, the U.S. still slapped tariffs up to 50 % on things like imported steel and aluminum.

8:44Sierra Juarez:This is the atmosphere in which the USMCA is being reconsidered today. Antonio says more so than when NAFTA was being negotiated in the 90s, the talks surrounding the USMCA seem a lot more adversarial, more zero-sum. I'm watching a lot of World Cup games. A goal is zero-sum. But I don't think that in many instances, trade is zero-zum. And sometimes it's treated like that. And if it's treated like that, you could end up in a situation where all countries lose. I like to explain the potential outcomes of the USMCA review as win-win or lose-lose. A win-win is pretty clear, right? Everybody makes money.

9:31Sierra Juarez:Everybody's happy. But how could it be a lose-lose? Well, Antonio says take the issue of autos. Trump reportedly wants cars to be made with at least 50 % American parts in order to qualify for preferential tariff treatment. And while that might be a win for U.S. auto parts makers, Antonio says that it could also backfire. That requirement could make the resulting cars more expensive, which could ultimately make North American cars less competitive on the global market. Lose-lose. We reached out to the White House to ask how they respond to Barry's criticism that the U.S. is more concerned with flexing its power than fostering mutually beneficial trade.

10:12Sierra Juarez:White House spokesperson Kush Dostai responded, quote, The sole motivation of the Trump administration's trade agenda is to end the decades-long era of American workers and businesses being ripped off and undermined by unfair foreign trade practices, end quote. This episode was produced by Corey Bridges and engineered by Travis Hagan. It was fact-checked by Sierra Juarez. Kicking Cannon is our editor and the indicators are production of NPR. This message comes from Capella University. You know that feeling when there's a spark building inside you that you were meant for more? That's your own drive pushing you towards what's next.

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