The Rule of the Arbitrary

President Trump hated the original North American Free Trade Agreement (NAFTA) so much that he refused to call his new North American trade agreement with Canada and Mexico a New NAFTA so he called it the US, Mexico and Canada Agreement with the acronym of USMCA – an unpronounceable and unremarkable set of letters. He couldn’t call it the USMC trade agreement because the Marine Corps (unlike other militaries around the world) does not engage in commerce. So New NAFTA it is.

For all the Sturm und Drang on the Twitterverse from the President, most people will view the New NAFTA much like the old NAFTA. There are enough changes in the New NAFTA for President Trump to claim a tremendous victory but in truth much of the boilerplate of the agreement will be the same and the digital technologies and intellectual property clauses in the New NAFTA were lifted from the Trans-Pacific Partnership (TPP).

The New NAFTA provides that the North American content for motor vehicles increases from 62.5% to 75%, which will require manufacturers to seek new sources of supply for some parts. In addition, 40% of the workers on the North American vehicles must make over $16/hour, a move that might help American workers or might be a big bonanza for Mexican workers. Putting in a fixed minimum wage seems to be a bit odd. I mean, in ten years when McDonald’s workers are all getting $15/hour (as they are currently demanding) a $16/hour auto worker wage won’t seem that great.

They did put in a sunset clause that would terminate the agreement in 16 years but the agreement also includes a six-year review to renew and update the agreement at which time the pact could be extended another 16 years ad infinitum.

While some of the provisions of the New NAFTA are pathetic attempts to bring back the US manufacturing industry of the mid-twentieth century from the dead, other provisions have a more sinister impact. The Trump administration wanted to eliminate the investor-state dispute settlement (ISDS) system where companies can challenge foreign governments if that country enacts a policy that violates the terms of the trade agreement. Mr. Trump and his advisors don’t like these clauses and aver that they infringe on US sovereignty and encourage companies to offshore production.

But these clauses are essential when conducting international business. While working as an international banker my banks always required any loan agreement or bond indenture to subject to US or UK legal jurisdiction, meaning that if the borrower broke the terms of the agreement we could sue in the United States or UK. The reason for this was that the rule of law was very weak in many foreign countries and a legal dispute was very likely to be decided based national interest instead of the merits of the case. For example, while I was in Mexico, a friend had his business stolen from by his well-connected Mexican partner and he couldn’t get justice from the Mexican court system (he actually got thrown into jail for a while).

The rule of law has made great strides around the world since I was drafting those documents thirty plus years ago and most countries now require domestic law jurisdiction for these international transactions. The investor-state dispute settlements (ISDS) protect investors in case the rising tide of the rule of law around the world begins to ebb.

In the New NAFTA investor-state dispute resolution clauses, illogically and arbitrarily, apply to some industries and not to others. But President Trump wants the ability to use the sovereign power at his disposal to shape American industry as he sees fit. Even worse, while Chinese industrial policy is focused on creating new technologies such as artificial intelligence and 5G networks employing highly skilled workers, President Trump’s industrial policy is attempting to recreate mid-twentieth century manufacturing industries employing lower-skilled blue-collar workers.

President Trump’s actions put him in the same bucket as far-left progressives by focusing on “what ever works” solutions in order to achieve pre-ordained outcomes rather than resolving the underlying problems that caused the unwanted outcomes. These “what ever works” solutions undermine the rule of law and concentrate even more power in the hands of the executive branch.

So the New NAFTA is a retreat from the intent of promoting free trade that has been the hallmark of US trade policy for decades although, thankfully, not the full-fledged destruction of our trade relationships that had been threatened. And we should also be thankful that the required discussions on renewing New NAFTA in six years will begin after President Trump has left the White House. Maybe then we can begin to focus on authoritarian mercantilist regimes that try to weaken and evade the rules of international free trade instead of our friends and allies.