The U.S. has initiated a global trade war by steeply raising tariffs.
But in the midst of this tense context, a bilateral deal has been reached between the U.S. and Mexico, which offers some hope for reducing tensions.
What is the context of the deal?
NAFTA deal was tripartite agreement between “Canada, U.S. and Mexico” that was signed in 1994 and was operational till recently.
President Trump had called for renegotiating the terms of the deal, which he felt was discriminatory to the U.S. and causing loss of business.
In June 2018, Mr. Trump had stated that he was inclined to sign two different agreements with Mexico and Canada as a replacement to NAFTA.
U.S. and Mexico recently reached a bilateral trade agreement that will replace the decades-old North American Free Trade Agreement (NAFTA).
In this context, with the deal with Mexico over, the U.S. has now invited Canada to join talks for a renegotiation of trade terms.
What are the specifics of the current deal?
This has come up after Mexico agreed to some concessions demanded by the Donald Trump administration in the U.S.
According to the new agreement, 75% of all automobile content must be made regionally, which is higher than the current level of 62.5%.
Further, the agreement mandates that 40-45% of such content must be manufactured using labour that costs at least $16 an hour.
U.S. hopes that this will discourage manufacturers from moving their facilities to Mexico, where labour is available at rates lower than in the U.S.
Notably, U.S. stocks rallied after news of the deal, with the Nasdaq Composite index moving above the 8,000 level for the first time ever.
What are the larger implications?
The market reaction was probably a sign of relief, amid hopes that tit-for-tat tariff wars between the U.S. and its trade allies could now draw to a close.
This is also significant as Mexico had earlier joined hands with other economies such as Canada, China and EU to impose retaliatory tariffs on U.S.
Mexico’s decision could set an example for other countries which have resorted to retaliatory tariffs to deal with Mr. Trump’s aggressive trade war.
Notably, China has been at the forefront of this approach, slapping tariffs on several U.S. goods, together worth billions of dollars.
What is the way ahead?
Mr. Trump’s protectionist trade policy, including the current deal which increases restrictions on cross-border trade, is bad for the global economy.
However, the best way to win the trade war against the U.S. may simply be to accept “defeat” by refusing to double down on retaliatory tariffs.
This is born out of the reason that retaliatory tariffs can only cause further harm to the world economy by increasing the burden of taxes.
This will disproportionately harm the private sector, which is crucial to spur growth and create jobs in the economy.
Further, to repeat Mr. Trump’s mistake of depriving domestic consumers of access to useful foreign goods, and this isn’t desirable.
While protecting the domestic businesses is indeed one ground on which countries may impose tariffs, it needs to be judiciously used.
The right response to Mr. Trump’s trade war will be to abstain from any mutually destructive tit-for-tat tariff regimes, while pressing for better deals.
