Category Archives: Mexico

30/3/19: The Art of Trade Fudge: USMCA


Much-lauded Trump's Nafta 2.0, officially known as the United States – Mexico – Canada Agreement (USMCA) came to being on November 30, 2018. In his State of the Union speech on February 5, 2019, President Donald Trump claimed that the USMCA will replace “the catastrophe known as NAFTA” and “deliver for American workers like they have not had delivered to for a long time.” In a brief summary of the USMCA, Vox (see https://www.vox.com/2018/10/3/17930092/usmca-nafta-trump-trade-deal-explained) has effectively argued that the new Agreement is largely a rehashing of the original Nafta - a step in no new direction, with only minor modifications of the Trump-hated agreement.

Last week, the IMF piped in with its own analysis of the Agreement. The new IMF paper (see: https://www.imf.org/en/Publications/WP/Issues/2019/03/26/NAFTA-to-USMCA-What-is-Gained-46680) provides "an analytical assessment of five key provisions in the new agreement, including:

  • tighter rules of origin in the automotive, textiles and apparel sectors, 
  • more liberalized agricultural trade, and 
  • other trade facilitation measures." 
So how good is the USMCA in driving forward trade and investment flows between the three economies? Per IMF, the "results show that together these provisions would adversely affect trade in the automotive, textiles and apparel sectors, while generating modest aggregate gains in terms of welfare, mostly driven by improved goods market access, with a negligible effect on real GDP. The welfare benefits from USMCA would be greatly enhanced with the elimination of U.S. tariffs on steel and aluminum imports from Canada and Mexico and the elimination of the Canadian and Mexican import surtaxes imposed after the U.S. tariffs were put in place."

So, repealing the problem created by Mr. Trump - steel and aluminum tariffs - has more potential for welfare gains for Mr. Trump's electorate, than the new Nafta agreement that Mr. Trump claims to be one of his Administration's major achievements.

Mr. Trump has referenced, on many occasions, the need for reducing U.S. trade deficits with Mexico and Canada as the core justification for altering Nafta. IMF analysis of the USMCA shows that under the most welfare-enhancing scenario of USMCA introduction, accompanied by normalization of trade in steel and aluminum, U.S. trade deficit with Mexico can be expected to improve by only USD576 million per annum (0.58%), and with Canada by USD 1,781 million (4.31% improvement). However, U.S. trade balance with the rest of the world is expected to worsen by USD 2,698 million (a deterioration of 0.375%), more than offsetting the gains from Canada and Mexico trade.

Worse, U.S. workers will see no material gains from USMCA, as the IMF estimates presented in Table 9 (below) show:

As noted above, IMF projects no material growth boost from USMCA. More detailed analysis - by sector - shows that under the scenario involving repeal of Trump tariffs (the only scenario with positive welfare impact of USMCA), only two non-agricultural sectors of the U.S. economy can expect gains in output: food manufacturing and Other Manufacturing. In contrast, six sectors are likely to see their output decline:


All in, the IMF research shows the extent of economic fudge that is the current Administration's trade and investment policy. The art of the deal seems to be the art of faking soundbites and slogans, while delivering nothing new.

30/3/19: The Art of Trade Fudge: USMCA


Much-lauded Trump's Nafta 2.0, officially known as the United States – Mexico – Canada Agreement (USMCA) came to being on November 30, 2018. In his State of the Union speech on February 5, 2019, President Donald Trump claimed that the USMCA will replace “the catastrophe known as NAFTA” and “deliver for American workers like they have not had delivered to for a long time.” In a brief summary of the USMCA, Vox (see https://www.vox.com/2018/10/3/17930092/usmca-nafta-trump-trade-deal-explained) has effectively argued that the new Agreement is largely a rehashing of the original Nafta - a step in no new direction, with only minor modifications of the Trump-hated agreement.

Last week, the IMF piped in with its own analysis of the Agreement. The new IMF paper (see: https://www.imf.org/en/Publications/WP/Issues/2019/03/26/NAFTA-to-USMCA-What-is-Gained-46680) provides "an analytical assessment of five key provisions in the new agreement, including:

  • tighter rules of origin in the automotive, textiles and apparel sectors, 
  • more liberalized agricultural trade, and 
  • other trade facilitation measures." 
So how good is the USMCA in driving forward trade and investment flows between the three economies? Per IMF, the "results show that together these provisions would adversely affect trade in the automotive, textiles and apparel sectors, while generating modest aggregate gains in terms of welfare, mostly driven by improved goods market access, with a negligible effect on real GDP. The welfare benefits from USMCA would be greatly enhanced with the elimination of U.S. tariffs on steel and aluminum imports from Canada and Mexico and the elimination of the Canadian and Mexican import surtaxes imposed after the U.S. tariffs were put in place."

So, repealing the problem created by Mr. Trump - steel and aluminum tariffs - has more potential for welfare gains for Mr. Trump's electorate, than the new Nafta agreement that Mr. Trump claims to be one of his Administration's major achievements.

Mr. Trump has referenced, on many occasions, the need for reducing U.S. trade deficits with Mexico and Canada as the core justification for altering Nafta. IMF analysis of the USMCA shows that under the most welfare-enhancing scenario of USMCA introduction, accompanied by normalization of trade in steel and aluminum, U.S. trade deficit with Mexico can be expected to improve by only USD576 million per annum (0.58%), and with Canada by USD 1,781 million (4.31% improvement). However, U.S. trade balance with the rest of the world is expected to worsen by USD 2,698 million (a deterioration of 0.375%), more than offsetting the gains from Canada and Mexico trade.

Worse, U.S. workers will see no material gains from USMCA, as the IMF estimates presented in Table 9 (below) show:

As noted above, IMF projects no material growth boost from USMCA. More detailed analysis - by sector - shows that under the scenario involving repeal of Trump tariffs (the only scenario with positive welfare impact of USMCA), only two non-agricultural sectors of the U.S. economy can expect gains in output: food manufacturing and Other Manufacturing. In contrast, six sectors are likely to see their output decline:


All in, the IMF research shows the extent of economic fudge that is the current Administration's trade and investment policy. The art of the deal seems to be the art of faking soundbites and slogans, while delivering nothing new.

I would rather pursue policies that brings the US and region closer together.



Initially, I thought that President Trump's call for a border wall could simply be interpreted as a call for greater border security. However, it doesn't really look like that is the case. Sure, he wants more border patrol agents but it is hard to link them to security either because, in terms of apprehensions, the ones we have are not very busy.
Even with apprehensions at low levels, the President wants to increase the number of agents. For several years now, however, the US has had a very difficult time maintaining current staffing levels, let alone increasing them. After winning a $297 million contract, Accenture has been able to fill two of 5,000 border patrol positions they were hired for. Fortunately, they have only received a few million dollars so far. CBP seems to have already lowered its standards and still can't hire what the president wants.
  
And then there is the comic that started this post. President Trump wants a wall or fence or something he can call a wall. He might or might not want it to cross the entire 2,000 mile border. However, it's not as simple as building a wall. For the wall to be effective, the US would need to extend roads for the length of the wall. That way agents would be able to patrol the wall in order to apprehend those going over, or under, it. Such an initiative would probably require a great deal more agents than we already have. You would probably need to establish outposts as well, perhaps where agents could stay for a few days. Plus, it's not as if you just build the wall and walk away. The wall and roads would require significant resources each year to maintain.

Much of the border land is owned by US citizens and tribes. Either it'll be very expensive to purchase the land or those who own it have no interest in selling it. Some of the ranchers I've met with outside Nogales moved out to the border area decades ago to get away from the federal government. They are not really interested in more government now.

When reporters looked at this issue around the 2016 election, the company best positioned to provide supplies for the wall would be CEMEX, which probably wouldn't go over too well with President Trump or the Mexican people.

Then there are the environmental costs related to the material used to build and maintain the wall. Migratory patterns would be disrupted and wildlife would suffer. In general, people living along the border don't want additional walls. 

I honestly don't get why President Trump wants to make enemies of our neighbors and allies. His misunderstanding of the causes and consequences of migration are really powerful. For me, I would rather pursue policies that bring the US and region closer together. That, however, will have to wait until another administration takes office in the White House.

I would rather pursue policies that brings the US and region closer together.



Initially, I thought that President Trump's call for a border wall could simply be interpreted as a call for greater border security. However, it doesn't really look like that is the case. Sure, he wants more border patrol agents but it is hard to link them to security either because, in terms of apprehensions, the ones we have are not very busy.
Even with apprehensions at low levels, the President wants to increase the number of agents. For several years now, however, the US has had a very difficult time maintaining current staffing levels, let alone increasing them. After winning a $297 million contract, Accenture has been able to fill two of 5,000 border patrol positions they were hired for. Fortunately, they have only received a few million dollars so far. CBP seems to have already lowered its standards and still can't hire what the president wants.
  
And then there is the comic that started this post. President Trump wants a wall or fence or something he can call a wall. He might or might not want it to cross the entire 2,000 mile border. However, it's not as simple as building a wall. For the wall to be effective, the US would need to extend roads for the length of the wall. That way agents would be able to patrol the wall in order to apprehend those going over, or under, it. Such an initiative would probably require a great deal more agents than we already have. You would probably need to establish outposts as well, perhaps where agents could stay for a few days. Plus, it's not as if you just build the wall and walk away. The wall and roads would require significant resources each year to maintain.

Much of the border land is owned by US citizens and tribes. Either it'll be very expensive to purchase the land or those who own it have no interest in selling it. Some of the ranchers I've met with outside Nogales moved out to the border area decades ago to get away from the federal government. They are not really interested in more government now.

When reporters looked at this issue around the 2016 election, the company best positioned to provide supplies for the wall would be CEMEX, which probably wouldn't go over too well with President Trump or the Mexican people.

Then there are the environmental costs related to the material used to build and maintain the wall. Migratory patterns would be disrupted and wildlife would suffer. In general, people living along the border don't want additional walls. 

I honestly don't get why President Trump wants to make enemies of our neighbors and allies. His misunderstanding of the causes and consequences of migration are really powerful. For me, I would rather pursue policies that bring the US and region closer together. That, however, will have to wait until another administration takes office in the White House.

Mexico considering $30 billion Central American investment to stop migrant crisis — US should, too

I have an op-ed with The Hill arguing that the US should provide greater attention and resources to the humanitarian crisis in Central America.
President Andrés Manuel López Obrador is considering a plan to invest $30 billion over the next five years to promote development in Central America’s Northern Triangle of El Salvador, Guatemala, and Honduras. The plan’s details are still unsettled but investing in Central America, and even southern Mexico, to reduce the number of people who feel that they have no choice but to leave the region is worth the investment.
Central America's political and economic development needs to be more of a priority. This plan might not address the needs of the millions of people who have already left and are in transit somewhere in Mexico or awaiting asylum hearings in the United States, which should also be addressed. A few million dollars here and there with little follow-through has not cut it. The United States should work with its Mexican and Central American partners to address the immediate and long-term needs of those living amidst a humanitarian crises.
Given the cast of characters now occupying the highest elected office in the United States, Mexico, and Central America's Northern Triangle, I'm skeptical about a truly transformative initiative. However, several opportunities for cooperation on mutually beneficial policies do exist.

You can read my thoughts here