Hafta Talk NAFTA
August 29, 2018
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SCOTT MILLER: I’m Scott.
WILLIAM ALAN REINSCH: I’m Bill.
MR. MILLER and MR. REINSCH: (Together.) And we’re The Trade Guys.
H. ANDREW SCHWARTZ: You’re listening to The Trade Guys, a podcast produced by CSIS, where we talk about trade in terms that everyone can understand. I’m H. Andrew Schwartz. And I’m here with Scott Miller and Bill Reinsch, the CSIS Trade Guys.
The U.S. and Mexico announced an agreement this Monday on the key sticking points on NAFTA. The two countries have been negotiating NAFTA for over a year.
PRESIDENT DONALD TRUMP: (From recording.) It’s an incredible deal. It’s an incredible deal for both parties.
MR. SCHWARTZ: But the deal still needs approval by the United States Congress and the Mexican legislature. And negotiators still hope that Canada will join the deal as well. These are all big issues to dissect. And we’ll put it to The Trade Guys.
Gentlemen, we have to talk NAFTA. What happened?
MR. MILLER: (Laughs.) What?
MR. SCHWARTZ: We have to talk NAFTA? What happened? One of the partners is not happy, one of the partners is happy. There was a funny phone call from the Oval office yesterday where there were a lot of button pushed and eventually –
MR. REINSCH: Apparently they had a little trouble connecting.
MR. SCHWARTZ: Yeah. The president stayed incredibly calm during that, I thought. I watched the video of it. And he was calm, cool, happy about the deal. He’s very happy about the deal. Are we happy about the deal, Trade Guy Bill and Trade Guy Scott?
MR. REINSCH: Most people seem not to be happy about it, or at least mixed. The fine print is rolling out today and there’s a lot of issues where you need the fine print. The farmers have mixed views. They like some of it. It enshrined old stuff they liked – zero tariffs. It put in a bunch of new stuff that everybody likes – upgrades is what we’ve been calling them, digital trade, things that the original agreement didn’t address. There is nervousness in the business community about the dispute settlement chapters, which have been either provisionally eliminated or modified in ways that make them less effective from a business standpoint.
MR. SCHWARTZ: They also announced $4.7 billion is aid to farmers. So maybe that made them happy. Although, the farmers we’ve talked to aren’t happy about that.
MR. REINSCH: Well, my father-in-law was a farmer. Farmers are never happy. There’s a rule about this. (Laughter.) You’re not allowed to be happy.
MR. SCHWARTZ: Scott’s father was a farmer.
MR. MILLER: Yes.
MR. REINSCH: Was he ever happy?
MR. MILLER: No.
MR. REINSCH: Well, there you go.
MR. MILLER: He followed the rule on this. But, no, look, it was interesting today –
MR. SCHWARTZ: For the record, my father is a business man – was, is a businessman. Very happy guy.
MR. MILLER: Well, good.
MR. SCHWARTZ: Yeah. (Laughs.)
MR. MILLER: So there’ something to be learned from that.
MR. REINSCH: No, I thought you were just telling us he was a gangster.
MR. SCHWARTZ: Grandfather.
MR. REINSCH: Oh, oh, oh, I see.
MR. SCHWARTZ: Grandfather maybe –
MR. REINSCH: So father went straight.
MR. SCHWARTZ: Yeah. Father straight up. Yeah.
MR. MILLER: We don’t consider that a stereotype and offensive, yes.
MR. SCHWARTZ: Well, he might – if my dad’s listening, and he will be listening, he kind of would like to be known as a gangster. We – all of us Schwartz’ have a little bit of gangster in us. (Laughter.)
MR. MILLER: Well, in terms of what we actually learned yesterday, I thought the best comment as part of the briefing came from Ambassador Robert Lighthizer, the U.S. trade representative. At one point he said: If you’re not confused, you’re just not paying attention.
MR. SCHWARTZ: OK.
MR. MILLER: So what they released is some top line information. We actually won’t know a lot with any certainty until we actually read the text. And that’s presuming that the administration intends to have a text which they would sign sometime later this week.
MR. REINSCH: But they don’t need one. All they need this week, if they want to sign the agreement while the president – the current president of Mexico, Pena Nieto, is in power, that’s what’s driving this week’s train.
MR. MILLER: They just notify.
MR. REINSCH: All they need to do on Friday is send a letter to the Congress notifying them that they intend to enter into an agreement. But then a clock starts ticking. A clock starts ticking on Friday and they have 30 days to deliver a text. So on day 30 at least, then we get a text and get to look exactly what they agreed to.
MR. SCHWARTZ: All right. This is so complicated. And you mentioned –
MR. REINSCH: That’s because you’re not paying attention. That’s what Lighthizer said, I guess.
MR. SCHWARTZ: I guess we’re not paying enough attention. But I actually think we are paying a lot of attention here on The Trade Guys. But, you know, it’s very complex too. You mentioned that Pena Nieto is leaving office. There’s going to be a new Mexican president who goes by the acronym AMLO, right? And AMLO’s happy about the deal too. But one guy who’s not happy about the deal, as far as we know, is Canadian Prime Minister Trudeau, who is still reeling from being called weak by President Trump, among other things.
MR. MILLER: Well, it’s very interesting. He’s got a lot of reasons to be unhappy. Look, one of the centerpieces of the Trump’s team’s negotiating objectives were a set of rules of origin on our automobiles, which would incentivize greater production in the United States, or in high-wage countries. They seem to have accomplished that. So there is a rule of origin package. And actually Canada ought to like that. They may benefit from it as well. But –
MR. SCHWARTZ: But there’s other things Canada doesn’t like on the auto industry, right?
MR. MILLER: Well, in fact, there’s a lot of things. In fact, I looked through the U.S. trade representative’s fact sheet. It’s aa six-page document. And the first three and a half pages are all things that are hard for Canada. It was very interesting. It’s as if the U.S. and Mexico followed Russell Long’s maxim: Don’t tax me, don’t tax thee, tax that fellow behind the tree.
MR. SCHWARTZ: (Laughs.) It’s a great one.
MR. MILLER: And they – and they seemed to identify almost everything in intellectual property, in financial services, even down to things like de minimis, which is the threshold under which – a value for a good under which customs don’t pay attention to the order. OK, so –
MR. REINSCH: Yeah, but that was never going to be the same.
MR. MILLER: It was never going to be the same. It was never going to be easy. But there’s a whole series of things that were featured in this. I mean, this is fact sheet that says the really important things we did. And the whole list of them were things that are were hard for Canada, particularly in the area of intellectual property, in terms of copyright, trademark and trade secrets law, in terms of biologic protection for data on biologics, which U.S. and Mexico agreed to 10 years. Canada has consistently opposed that. It’s almost as if they went through the negotiating notes from the Trans-Pacific Partnership and picked all the things that Canada didn’t like and included them in here.
Now, I won’t – don’t give a sense of malice. But they also, Mexico and the United States, agreed to completely eliminate so-called Chapter 19 dispute settlement. That’s a binational panel that reviews anti-dumping rulings. And it was a – it was a last-second must-have issue in the U.S.-Canada FTA. It was a must-have issue in the NAFTA. The U.S.-Mexico team decided we’re not going to move it forward. They talked about it yesterday in the past tense. So what’s left is a very short timetable for Canada and a lot of really hard issue – in fact, I would argue, harder issues than there were a week ago.
MR. REINSCH: But this gets what – to what, for me, is the great unknown, which is how much of this is the Mexicans selling out the Canadians, and how much of this is provisional? I mean, if the Canadians come back and say: We can’t accept 10 years on biologics, we can’t accept getting rid of Chapter 19, we can’t accept some of this other stuff –
MR. SCHWARTZ: We can’t accept you freezing us out on milk.
MR. REINSCH: Oh, yeah. What are the Mexicans – then what are the Mexicans going to do? Are they going to say, well, sorry, we agreed to that and, you know, you’re on your own? Or are they going to say: We support you?
MR. MILLER: OK, let’s meet halfway, or something like that.
MR. REINSCH: Let’s compromise.
MR. SCHWARTZ: Well, so right now we don’t have NAFTA. We have MAFTA, Mexican-American Free Trade Agreement, minus Canada. That’s what we have right now.
MR. REINSCH: Actually, I think it’s MATA, because Trump took the word “free” out of it.
MR. MILLER: “Free” is out of it.
MR. REINSCH: Free is gone.
MR. SCHWARTZ: He does not like the word “NAFTA,” or the acronym “NAFTA,” so.
MR. MILLER: Well, definitely he –
MR. SCHWARTZ: MATA.
MR. MILLER: He will not say the acronym.
MR. SCHWARTZ: So it ain’t going to MATA if Canada is not part of this agreement, right?
MR. MILLER: He’s also, truth in advertising, he made trade less free with this agreement.
MR. SCHWARTZ: Right.
MR. MILLER: It is more restrictive. It’s more difficult to qualify for the preferences than it was before.
MR. SCHWARTZ: So Trump is upset fundamentally because he believes NAFTA has cost Americans jobs, correct?
MR. REINSCH: Yes.
MR. SCHWARTZ: That’s the fundamental thing.
MR. MILLER: Particularly in manufacturing.
MR. SCHWARTZ: OK. So the last time I checked, Americans are not going to work in a factory making schmattas that they sell at Walmart.
MR. MILLER: Well, look –
MR. SCHWARTZ: Right? I mean, let’s just – (laughs) –
MR. MILLER: Let’s look at the big picture. First of all, the United States makes more things than it ever has before. The U.S. –
MR. SCHWARTZ: But not cheap things that Americans want, right?
MR. MILLER: That’s right. Total manufacturing output –
MR. SCHWARTZ: That’s what I mean by schmattas. Like, we – Americans like our cheap stuff. And we like the cheap stuff that we import.
MR. MILLER: Yes, but we do make a lot of stuff. We made more stuff last year than ever before.
Now, let’s talk about jobs. In the year NAFTA was entered into force, 1994, the Bureau of Labor Statistics said there were about 100 million people working in America. Last year, there were 135 million people working in America.
MR. SCHWARTZ: Which is a great thing.
MR. MILLER: Thirty-five million more jobs than when NAFTA entered into force.
MR. SCHWARTZ: And is that because of manufacturing or –
MR. REINSCH: No.
MR. MILLER: It’s because of dramatic changes in the economy, manufacturing shrunk as a sector in enrollment and employment.
MR. SCHWARTZ: We actually have more jobs in America –
MR. MILLER: Oh, a third more.
MR. SCHWARTZ: After we signed NAFTA. He’s complaining we lost jobs. I don’t get it. You guys have to help me understand this.
MR. MILLER: Well, look, the world’s changed. And the world changed a lot since 1994. And global production systems have led to basically an allocation of manufacturing output that is roughly equivalent to the skill of the workforce. The U.S. has a high-wage, high-skill, high-tech workforce. We make high-tech products. The rest of the world is now part of the production system, making lower-wage, lower-tech products. And it all works together because of global value chains.
MR. SCHWARTZ: And a lot of people think that’s desirable, correct?
MR. REINSCH: Well, yes. I’m not sure the president does. But keep in mind that what Scott hasn’t mentioned is that the U.S. economy has really transitioned to a services economy. Seventy-five percent of our economy is services. He’s right we’re making more stuff –
MR. SCHWARTZ: We are providing a service here at The Trade Guys.
MR. REINSCH: And we are service – we are not manufacturers. We are not assembly line workers.
MR. MILLER: The three of us are part of the services industry.
MR. SCHWARTZ: Yeah.
MR. REINSCH: We are. On the manufacturing side, we have lost jobs. We’re making more stuff, Scott is right, with fewer people. Steel’s a classic example of that. We’re making more steel I think than we’ve ever made but with, what, less than one-third of the workers from peak.
MR. MILLER: About that, yes.
MR. REINSCH: So that’s a product largely of technological improvement. Trump will tell you it’s a product of NAFTA. But the question that is still on the table is will this agreement bring any of those back. And I’m hard-pressed to figure out how they will do that.
MR. MILLER: Well, look, we’ll find out when the industry looks at this. But I think – I think the answer is that it won’t, OK? My view is that there are stricter rules of origin for automobiles, no question. Higher NAFTA content or regional content and higher wages. There’s a wage component to the content rule.
MR. SCHWARTZ: And those are all good things in this agreement that they negotiated.
MR. MILLER: Maybe, OK, maybe not.
MR. SCHWARTZ: Oh, maybe? OK.
MR. MILLER: But I think what you’ll have is there are a group of facilities making certain vehicles in the United States and Mexico which already meet the new higher standard. In which case, they’ll go on as if they were. The facilities which do not meet that have a choice: Either change your operation to meet it or pay a 2 ½ percent tariff. Essentially, move to the MFN level instead of the preferential level.
MR. SCHWARTZ: So you’re either at zero and you stay where you are or – you’re either at zero and you comply or you’re at – or you pay a 2 ½ percent tariff.
MR. MILLER: Yes. And if I were betting –
MR. SCHWARTZ: If you don’t have $16-an-hour workers, for instance.
MR. MILLER: If I were betting, if you are – can’t – if you are unable to meet the rule without dramatic change to your supply base, you will simply pay the 2 ½ percent and then make your supply base even more efficient because you no longer need to comply with the old 62 ½ percent content rule.
MR. SCHWARTZ: I see.
MR. MILLER: So –
MR. REINSCH: Well, wait a minute. I would argue two things: One, I don’t think there’s anybody that could comply with these new rules because I don’t think there’s anybody that can comply – that has a sufficient percentage of $16 an hour wages in Mexico.
MR. MILLER: Well, the Detroit three issued a very complimentary press release. So we need to look into this. OK.
MR. REINSCH: Yes, but they’re going to have – I think they’re all going to have to do something to fit.
MR. MILLER: It won’t be – it won’t be as easy as they made it sound. But the Detroit three did come out and say congratulations, this is a good deal.
MR. REINSCH: OK. The other piece of this, it’s like pushing on a balloon because what the administration has also said is, look, you do have the choice, but if – the 2 ½ percent choice is one that applies to existing factories and existing assembly lines. If you want to start a new model, a new car, a new assembly line, a new factory in Mexico, then it’s not quite clear what the tariff is going to be, because if the president uses 232, the national security provision, to impose car tariffs, those people will have to pay that tariff. And that might be 25 percent. And it’s kind of interesting to watch, because every time you squeeze over here, you know, the balloon pops out over there. So what they’ve done is said, well, we’re going to push back in over here. We’re going to have a 25 percent tariff. So you can’t do that. Then the car manufacturers will find another out. There’s always one more move.
MR. MILLER: Yeah. And let me just say, this is a level of micromanagement that we’ve not seen in trade policy. The idea that – the idea that a good –
MR. REINSCH: Right, thank you. Yes.
MR. MILLER: See, today in trade policy a good that crosses the border has an origin and it’s treated according to its origin. They don’t care what factory it comes from. Nobody even asks. You don’t look. It may be on the invoice, it may not be. But it’s the good that comes to the border and has an origin. It’s treated according to the origin. So now we’re going to subdivide origin into plants we like and plants we don’t like, OK? And I don’t know how you do that. I guess we’re going to have – go on a hiring binge in Customs and Border Protection.
MR. SCHWARTZ: Well, this is what I was going to ask you –
MR. REINSCH: And a lot of auditors.
MR. MILLER: I guess.
MR. SCHWARTZ: So this is what I was going to ask you gentlemen. And, Scott, you put your finger right on it. Because of the complexity of all this, because of all the added rules, because of the added micromanagement, aren’t we going to have to hire a whole bunch of trade lawyers, a whole bunch of auditors, a whole bunch of people who are going to have to monitor it?
MR. REINSCH: And they’re all service providers.
MR. MILLER: Yes.
MR. SCHWARTZ: Yeah, they’re all service –
MR. REINSCH: Not a single manufacturing job.
MR. MILLER: Boosting the service economy once again, that’s right.
MR. SCHWARTZ: Not a single – good point, good point. (Laughs.) But they’re all going – it creates a bigger bureaucracy to deal with all of this, right?
MR. MILLER: Well, yes. Look, I would say NAFTA is not simple to comply with now. The current NAFTA is – has some complexity and requires attention to be able to qualify for the preference. Anybody who uses the NAFTA preference – any firm who uses the NAFTA preference will tell you that. What they’ve done is taken what is a difficult compliance problem and made it more difficult.
MR. SCHWARTZ: And they made it difficult on Congress too, because Congress – Republicans in Congress, a majority of whom are free traders, are saying that they don’t even want to vote on this if Canada isn’t part of it.
MR. REINSCH: They’re saying that. I don’t believe that.
MR. SCHWARTZ: Why not?
MR. REINSCH: Because I think they won’t stand – the Republicans won’t stand up to the president on this. I think if he submits – well, if they’re still in charge when he submits this, because this isn’t going to be submitted till next year.
MR. MILLER: Yeah, this is a next Congress issue.
MR. SCHWARTZ: I was going to ask you, because Pena Nieto and Mexico and AMLO are not the only ones who are on the clock here. We’re on the clock. And if you’d explain that, I think that would be great. Ninety days, right?
MR. REINSCH: Well, 90 days to signing.
MR. MILLER: Signature.
MR. REINSCH: But then the clock – there’s two clocks.
MR. MILLER: Then another clock starts.
MR. REINSCH: Well, it doesn’t start then.
MR. MILLER: Right.
MR. REINSCH: The first clock stops when it’s signed. Then the second clock doesn’t start until the president actually submits an implementing bill to the Congress. Congress doesn’t get the agreement. Congress gets a bill that implements the agreement. So all Congress gets to vote on are the things that have to be changed in law in order to meet our commitments. So if we make commitments that don’t require any changes in U.S. law, Congress doesn’t get to vote on those. They only get to vote on things where the law has to change. The president sends up a bill. That’s what they vote on. The day that bill is sent up, there will be – then a new clock starts, which is the congressional clock. The gap between the old clock, which ends at signing, and the new clock, which starts with submission, that’s untimed.
But there’s certain things that have to happen in between. The biggest one is that the International Trade Commission, which is a body that does a lot of things but in this case it’s by statute tasked with assessing the economic cost and benefit of the agreement that the president has negotiated. And the law gives them 105 days to do that, starting the day that it’s signed. And the agreement cannot be submitted to Congress until that report is concluded.
MR. SCHWARTZ: So, like the NBA has a shot clock, this is The Trade Guys shot clock.
MR. REINSCH: Well, and typical of trade, it’s a long clock.
MR. SCHWARTZ: It’s a long clock.
MR. REINSCH: It’s not a 30-second clock.
MR. SCHWARTZ: No, no. Hundred and five days.
MR. MILLER: Yeah, they call it fast track but it’s not fast or on track. So the earliest it can be signed will be December 1st, OK, of this year.
MR. SCHWARTZ: That’s after the election.
MR. MILLER: After the election, but 105 days is well into the next Congress. And that’s what –
MR. SCHWARTZ: Right, because the new Congress will take effect in January.
MR. REINSCH: January 3rd, right.
MR. MILLER: And that’s only if they get it done right away. Keep in mind, with the Trans-Pacific Partnership it was signed, if I recall, in November of 2015. And the implementing bill was never presented to the Congress.
MR. SCHWARTZ: OK. So all the people who have been running around at rallies with NAFTA signs, and during the campaign with anti-TPP, for TPP – all the people who have made trade something of a wedge issue, which the president does stick to his campaign promises. He said he was going to do this. He’s now doing this. Are those people going to end up happy because of any of this? I mean, it doesn’t seem to me – it seems to me like this is a circle that just keeps going round and round. There’s a shot clock. There’s not a shot clock. There’s Canada. There’s not Canada. What are we looking at here for real, people?
MR. REINSCH: It’s very hard for me to see that the – the demonstrators on the left, the anti-trade folk on the left will be satisfied. Organized labor might be, because they’ve beefed up the labor provisions somewhat. They’ve made the agreement enforceable. Trumka – Richard Trumka, the head of the AFL-CIO – came out with a – what, a balanced statement, Scott, would you say?
MR. MILLER: Yes.
MR. REINSCH: A neutral statement.
MR. MILLER: A hedged statement.
MR. REINSCH: A hedged statement. Didn’t say yes. Didn’t say no.
MR. SCHWARTZ: Surprising, right?
MR. REINSCH: Well, he’s not shy about saying no. So the fact that he didn’t say no was important. But he didn’t say yes. So I think he’s in wait and see mode.
MR. MILLER: Look, the rank and file have supported Trump. In fact, my theory of the 2016 election in the state of Michigan was that the Democratic Party spent a ton with the UAW and other unions on get out the vote and they all voted for Trump.
MR. SCHWARTZ: Or Jill Stein.
MR. MILLER: Or Jill Stein. But so I think the rank and file are very supportive of this, in terms of organized labor industrial unions. The leadership is less clear. The question is how does that translate into votes? And nobody really knows. And, you know, so they’re going to have to get to work and build some bottom-up coalition for this. Or they just move ahead with things that they think don’t require the Congress. And I would note that in this sort of brief description, six pages, I couldn’t really identify anything specific where the Congress – where you actually had to change U.S. law. And so some of this may be implementable without congressional action.
MR. REINSCH: Well, if they get rid of Chapter 19 they’ll have to change U.S. law.
MR. MILLER: Yes.
MR. SCHWARTZ: What’s Chapter 19? Tell us what Chapter 19 is.
MR. REINSCH: Scott alluded to this earlier. That’s the chapter that allows another country – mostly Canada because it was their idea – to complain if they don’t like the results of one of our anti-dumping or countervailing duty cases, and to take it to a special dispute settlement tribunal.
MR. MILLER: A binational dispute panel.
MR. REINSCH: Binational panel. That was in the predecessor of NAFTA, the U.S.-Canada Free Trade Agreement. It carried over. So that would be one.
MR. MILLER: Which may be why this isn’t in the talking points. (Laughter.) Good point, though, yeah.
MR. REINSCH: Getting back – getting back to the politics of it, I’m still in the group that thinks that unless they make some huge mistake in what they end up agreeing to, I think the odds are still that this will be approved because I think that – well, certainly in a Republican Congress because the pro-trade Republicans, which are still many, will vote for it because it’s a trade agreement. And since Trump is all likelihood going to at the same time he submits the new old withdraw from the old one, the choice is going to be, you know, sort of my way or the highway. Take this or have nothing. I think those guys will vote for it because it’s something. I think the trade-skeptical Republicans, of which there’s a growing number, the Trump Republicans, the president’s giving them cover. He’s for it. So they’re going to say, you know, I’m more protectionist than Trump is? I don’t think so.
Now, the Democrats, different story. And if they control either house of Congress next year, then, you know, we have to do a different analysis.
MR. SCHWARTZ: Because they’ll want to preserve NAFTA as it is, right?
MR. REINSCH: Well, no.
MR. MILLER: They’ll want to oppose the president.
MR. REINSCH: They want to oppose the president. Their disposition at the leadership level is to do to Trump exactly what the Republicans did to Obama, oppose everything.
MR. SCHWARTZ: Oh boy.
MR. REINSCH: On top of that, you’ve got a lot of Democrats that never liked NAFTA and are probably not going to like this agreement either.
MR. MILLER: Right.
MR. SCHWARTZ: So this just keeps going around and round.
MR. MILLER: Oh, yeah. And in fact, Bill’s point is correct. Ambassador Lighthizer has talked about getting 20 to 25 Senate Democrats to vote for a trade bill. And when he made that observation I said, well, that’s 20 to 25 Senate Democrats more than have voted for any other single piece of legislation advanced by President Trump. So we have a – we have something very different going on in the politics that may – we may learn a lot when this goes forward.
MR. SCHWARTZ: Lighthizer also indicated that he’s fully trying to bring Canada back into the deal, versus Wilbur Ross and Mnuchin who are saying, hey, we’re fine with going it alone. We’re fine with having a bilateral agreement, or if they – or, I think, more to the point – more accurately, if Canada won’t get with the agreement, we’re fine with going alone with Mexico.
MR. REINSCH: Well, I think that’s because – I think that’s because Ambassador Lighthizer’s got his ear to the ground on the Hill a lot more than the other two do and understands what has happen to make this pass. They want Canada in. It’s going to be a whole lot easier to pass it if Canada is in.
MR. MILLER: Canada is still our largest trading partner by a lot.
MR. SCHWARTZ: And why would we want to freeze them out? That’s the – that’s the thing that’s hard to get here. I know we have some disputes over some provisions, and there’s things that we can work out. But a lot of this has been very threatening language, going back to the July meeting – going back to the July meeting where President Trump called Trudeau dishonest and weak, and Trudeau had criticized Trump for saying the metal tariffs were insulting, calling out – calling –
MR. MILLER: Personally, I don’t think this has anything to do with trade. I think it has to do with – Donald Trump beating up on Canada is good politics for Donald Trump. Justin Trudeau beating up on Donald Trump is good politics for Justin Trudeau.
MR. SCHWARTZ: Oh boy.
MR. MILLER: And so they are. And keep in mind, we’re soon – we very soon will be within the window of an election in Canada. So it would not surprise me at all to see a breakdown in negotiations on the NAFTA followed by snap elections.
MR. REINSCH: Wait, wait, I understand the Trudeau side. Why is beating up on Trudeau good for Trump politically?
MR. MILLER: He just seems to enjoy it. (Laughter.)
MR. SCHWARTZ: I mean, Trudeau is better looking than Trump. He’s younger. He’s cooler.
MR. REINSCH: He’s got better socks.
MR. MILLER: Well, but it’s –
MR. SCHWARTZ: Way better socks.
MR. MILLER: For me, it’s the same reason that Napoleon advocated hanging some admirals. It’s for the encouragement of the others, OK? (Laughter.) And so, you know, it’s one of these things. I think some –
MR. REINSCH: There’s a Chinese proverb about that – kill the monkey, scare the tiger.
MR. MILLER: Right. Scare the – kill the monkeys – or kills the chicken to scare the monkeys.
MR. SCHWARTZ: Oh, man.
MR. MILLER: Right. OK. And so there is –
MR. REINSCH: That’ll work.
MR. MILLER: That’s the method, I think, here. And that’s why the president is – often uses very harsh language with Canada.
MR. REINSCH: But I don’t see why that’s to his political advantage domestically. People don’t hate the Canadians.
MR. MILLER: No, but it just – it’s –
MR. SCHWARTZ: No. People love Canadian beer. People like –
MR. MILLER: He gets to play tough without any consequence. It’s kind of a – it’s simple. It’s like having a little brother – a smart-alecky little brother that you can smack around when mom’s not looking.
MR. SCHWARTZ: Well, that’s certainly what he’s doing.
MR. MILLER: That’s the way it looks to me. I’m just saying.
MR. SCHWARTZ: The optics of it are quite like that.
MR. REINSCH: So, Scott, do you think this means that the Canadians will not agree to anything this week just to spite him?
MR. MILLER: Well, that wouldn’t surprise me as an outcome. I’d actually – I’m not close enough to –
MR. SCHWARTZ: So Foreign Minister Chrystia Freeland is here in Washington this week trying to hammer it back in.
MR. MILLER: Yeah. That’s the right thing to do. And let’s see if they can pick up the pieces.
MR. REINSCH: And I’m betting that they’ll – 60/40 they come to an agreement this week.
MR. SCHWARTZ: Well, that’s a good thing, right?
MR. REINSCH: Well, we’ll see what it is that they agree to.
MR. MILLER: Look, here’s what’s a good thing.
MR. REINSCH: Probably.
MR. MILLER: If we stop squabbling about NAFTA – forget about the future. Let’s stop squabbling about NAFTA now. What you do is immediately increase investor confidence, which is a good thing. You reduce the uncertainty associated with the current zombie state of NAFTA. And third, you have a chance of lifting the steel and aluminum tariffs, which will free up agriculture trade, particularly to Mexico. Keep in mind, steel and aluminum tariffs on Mexico led to their retaliation on hogs, corn, and other ag products. So you immediately get the NAFTA ag machine working again if you lift the steel tariffs. So that’s the near-term politics of this. And if so – if you stop fighting, stop threatening to withdraw from NAFTA, reduce the investor uncertainty and get rid of the steel tariffs and eliminate that retaliation, all of a sudden there’s a lot of good news.
MR. SCHWARTZ: And it’s definitely to Trump’s advantage to get this done, because, I mean, yesterday the stock market went wild. Global markets were happy. NASDAQ above 8,000 for the first time in history.
MR. MILLER: The industry set records.
MR. SCHWARTZ: I think Bill’s checking his stock portfolio right now to see where we are today.
MR. REINSCH: Even as we speak I’m checking.
MR. MILLER: Pretty much going sideways.
MR. SCHWARTZ: (Laughs.) Right. So –
MR. REINSCH: And the answer is, up slightly. Up 33 as of this point.
MR. SCHWARTZ: Up slightly, OK. Right. So if they get a deal done by the end of the week, do we think – what could happen? It’s probably going to go up again.
MR. MILLER: But you get the deal done by September and you lift the steel and aluminum tariffs and get the retaliation lifted, all of a sudden things go back to normal. And it’s like after you beat your head against the wall for six months it feels so good when you stop. OK, that’s where traders will be.
MR. SCHWARTZ: Right. And another great fun fact is today consumer confidence was way up. That was reported as well.
MR. MILLER: All-time high.
MR. SCHWARTZ: All-time high.
MR. REINSCH: Really?
MR. MILLER: Yes.
MR. SCHWARTZ: All-time high. So you know, there’s some good things going on in this country economically. And what does the president want to do to make it better? He truly believes that this is – I mean, this is a core belief of his that he expressed during the campaign, for the last several years. He’s had a much better week this week talking about NAFTA than what he was talking about last week.
MR. MILLER: Look, he’s fulfilled a campaign promise. He’s got a new NAFTA. A year from now we’ll find out – or, next year we’ll find out whether the new NAFTA is actually good for the economy. But in the meantime, if you fulfill a campaign promise and stop doing all the bad things that you’re doing – like steel and aluminum tariffs that get retaliated – then all of a sudden you got a pretty bright picture.
MR. SCHWARTZ: And it looks like his strategy worked. It would look like his strategy worked.
MR. MILLER: If that’s the strategy, it’s masterful.
MR. REINSCH: He also got –
MR. SCHWARTZ: You heard it here first.
MR. REINSCH: He also got Manafort and Cohen off the front page for two days now.
MR. SCHWARTZ: There’s no question he did. I mean, they’re not off the front camera of CNN, that’s for sure, and MSNBC. But they’re off the front pages of all the major newspapers, including the ones the president doesn’t like. They’re talking about NAFTA. I mean, the headlines are blazing the last couple days. And it’s real news. It’s real – I mean, not real news as opposed to fake news. I mean, news – it’s policy news that people want to discuss. This is a healthy debate for America to talk about whether this is a good or a bad thing.
The thing I don’t understand is President Trump tweeted today, quote, “I smile at Senators and others talking about how good free trade is for the U.S. What they don’t say is that we lose Jobs and over 800 Billion Dollars a year on really dumb Trade Deals....and these same countries Tariff us to death. These lawmakers are just fine with this!” Can you help me understand that?
MR. REINSCH: He’s just wrong.
MR. MILLER: Well, the president –
MR. REINSCH: Scott will explain.
MR. MILLER: The president has a worker-centered economic policy. He is using Twitter to declare his support for workers. And Congress is just a convenient foil. He’s also being a good communicator, reinforcing his own talking points about the trade deficit, which is baloney, but it works for him. It’s simple and clear.
MR. SCHWARTZ: Explain why the trade – explain why this $800 billion figure that he refers to and the trade dynamic the United States is under – why is it phony?
MR. REINSCH: First of all, it’s not 800 (billion dollars). He only is looking – and this goes back to the nature of the economy. He’s only looking at goods. He’s not talking about services. We have a services surplus. If you factor that in, the actual number is, what, 550 (billion dollars)? Five hundred –
MR. MILLER: Yes. And it’s probably half that if you look at trade and value added, because of the times components cross borders and the number of intermediates that the U.S. exports.
MR. REINSCH: We’ve discussed this. Remember –
MR. MILLER: Yes. It’s very complicated.
MR. REINSCH: My iPhone here is all – I don’t know how much this one costs – but all, say, $500 of it counts as a Chinese import. The Chinese value of this phone was $5.60. So the – most of the value of this phone is American. But it doesn’t get counted in those numbers. It ignores as that.
MR. MILLER: Yes. The math is – right. The number is easy to fine, but the math is suspect.
MR. SCHWARTZ: And what he’s talking – what he’s talking about is the United States imports 811 billion (dollars) more in goods than it exports to other countries. But a lot of people, including Republicans, think that’s a good sign, because it allows American consumers to purchase lower-cost goods from overseas.
MR. MILLER: It is. And it also, in our national accounts, that surplus in the – that deficit in the current account of $800 billion is offset by a surplus in the capital account, investments that other – that foreign entities make in the United States.
MR. SCHWARTZ: And they’re still claiming – and Trump and his – some of his advisors believe that this is evidence that American jobs have been lost to foreign competitors and that they manufacture goods that are too cheap.
MR. MILLER: That’s right. Which is a pathetically simpleminded way of looking at – way of doing the arithmetic on GDP because net exports are a factor of GDP – are an element of the arithmetic of the gross domestic product. But the economy is so complex versus that simple arithmetic that believing it actually reflects something like that is just preposterous for anybody who’s got – or, who claims a Ph.D. in economics. It’s silly.
MR. SCHWARTZ: Bill?
MR. REINSCH: Couldn’t have said it better myself. He’s exactly right. But the myth continues, you know?
MR. MILLER: But communication is powerful. When you point out something called a trade deficit, deficits sound bad and trade means it’s about international trade. And that’s what gets cemented. And the president uses that talking point quite well.
MR. REINSCH: I think what worries me is I think – I think he believes it.
MR. MILLER: Oh, he does.
MR. SCHWARTZ: Oh yeah.
MR. REINSCH: It’s not a communication. It’s not just a tactic. He actually believes this.
MR. SCHWARTZ: Yeah, there’s no question. He believes it. And he also happens to be a fantastic communicator.
MR. MILLER: Yes.
MR. REINSCH: But it worries me that somebody can really believe something that’s so clearly wrong. That’s depressing.
MR. MILLER: Well –
MR. SCHWARTZ: Oh, man. We’re going into Labor Day weekend depressed. (Laughter.)
MR. REINSCH: Well, but we will be thinking about workers while we’re there, because it is Labor Day after all.
MR. SCHWARTZ: It is Labor Day. It is Labor Day. We will be thinking about American workers and the good of this country.
MR. REINSCH: And you’ll be marching in an AFL-CIO parade somewhere, Andrew, is that right?
MR. SCHWARTZ: I will have to fine one.
MR. REINSCH: I’m sure there is one. Go to Cleveland or someplace in Ohio. Scott, I’m sure they have a worker parade.
MR. SCHWARTZ: If I went to Cleveland I’d have to visit my in-laws. So we’re going to sit that one out.
MR. MILLER: OK.
MR. REINSCH: OK.
MR. MILLER: Just justify your backyard barbeque on Monday as celebration of American labor.
MR. SCHWARTZ: To our listeners, if you have a question for The Trade Guys, write us at TradeGuys@CSIS.org. That’s TradeGuys@CSIS.org. We’ll read some of your emails and have The Trade Guys react to it. Thank you, Trade Guys.
MR. MILLER: Thanks, Andrew.
MR. REINSCH: Thank you.
MR. SCHWARTZ: You’ve been listening to The Trade Guys, a CSIS podcast.