THE GLOBAL economy is humming: All major nations’ economies are growing, according to the International Monetary Fund. The generalized prosperity has enabled 150 out of 176 IMF-monitored countries in the world to increase exports. Taking advantage of these trends, 11 countries remaining in the Trans-Pacific Partnership after President Trump pulled out of it, including major partners such as Canada, Mexico, Japan and Australia, have decided to push ahead with their own version of that tariff-slashing deal.
Meanwhile, in Washington, a zero-sum trade ideology holds sway: Mr. Trump has just slapped punitive tariffs on imported washing machines (mainly from South Korea) and solar modules (mainly from China), claiming they compete unfairly with American rivals. And Mr. Trump’s negotiating team has arrived at North American Free Trade Agreement talks in Montreal armed with demands whose premise is that this country must reduce or eliminate its trade deficit with the NAFTA bloc, especially Mexico. Mr. Trump’s tariffs on washers and solar gear are counterproductive, but at least they phase out over the next few years; the World Trade Organization may invalidate them sooner than that. The damage from a blowup of NAFTA, by contrast, would be broad and long-lasting.
So let’s be clear about the U.S. trade deficit in goods with Canada and Mexico. Point one: This gap, which reached $75 billion in 2016, is not the major job killer in an $18.6 trillion U.S. economy. Point two: When you exclude the special case of trade in energy, about a third of the 2016 deficit disappears. Point three: Auto and auto-parts imports cause the remaining deficit, and this is indeed partly attributable to NAFTA, whose tariff reductions laid the basis for an integrated supply chain and shift of assembly plants to Mexico. If the Trump administration has any legitimate beef about NAFTA, it relates to the U.S. share of the auto-supply chain, which has evolved dramatically since the deal took effect nearly 25 years ago.
What the administration does not have, however, is a reasonable public position on how to update the rules. Washington insists on 85 percent made-in-North America content for vehicles traded duty-free in the NAFTA region, up from 62.5 percent currently. And of that, half would have to be U.S.-made; no comparable rule now exists. This would be a dealbreaker for Canada and Mexico (and a budget-buster for American car buyers). However, the two countries came to Montreal with ideas for meeting Mr. Trump halfway, possibly by updating definitions of domestic content and cracking down on the leakage of Asian-made parts via Mexico.
What no one knows is whether Mr. Trump wants to get to yes, as U.S. business, especially agriculture, has been intensively urging him in recent days, or whether he still believes that NAFTA is “ a bad joke,” as he tweeted last week. If the president reciprocates the good faith shown by U.S. neighbors, the result might actually be a new, improved NAFTA. If he acts according to his simplistic instincts, precipitating a rupture in the hemisphere’s economy, the joke will be on all of us.