The United States and Mexico are on the brink of a new bilateral trade deal that will give a bigger boost to our economy but also leave our wallets a bit emptier, according to a top free market economist.
On Monday, President Trump and Mexican President Enrique Pena Nieto announced they reached a consensus on a new trade agreement that Trump hopes will replace the North American Free Trade Agreement, or NAFTA, but thus far does not have Canada on board.
The agreement still includes many NAFTA provisions but also makes some important changes.
“Many of the agreements that were in NAFTA are actually in place within this bilateral trade deal, when you think about lowering tariffs and having a lot of freer trade in general. But the auto sector is one key point that there is definitely a difference compared with NAFTA,” said Vance Ginn, director of the Center for Economic Prosperity at the Texas Public Policy Foundation.
The proposed trade agreement requires that 75 of the parts of all automobiles sold in the U.S. and Mexico must be produced in the two countries. Currently, the mandate is 62 percent. The deal further requires that 40-45 percent of the workforce making those parts make a minimum of sixteen dollars per hour.
Ginn sees positives and negatives in the proposal. For example, he likes the fact that American business will have to do less guessing.
“It decreases the foreign trade uncertainty that’s been out there so long. That’s why we’ve seen the stock market go up a lot and a lot of these entrepreneurs are saying, ‘You know what? I can start to budget for the future and make some transactions,'” said Ginn.
He’s also glad to see a badly needed update on internet commerce, which is still based on language crafted in 1994.
“When NAFTA was created, e-commerce wasn’t a big deal and now it really is. So they put some rules in place that seem to be pretty free-market oriented,” said Ginn.
The problem, according to Ginn, is that stronger mandates on domestic production and hourly wages is not going to be pretty for American consumers.
“This will mean higher prices for auto consumers. As you raise the cost of doing production from a wage standpoint and a parts of origin standpoint, where the production will take place. Often times you’ll find the best place to do it based on the lowest costs and the highest quality. And this seems to take that out a little bit,” said Ginn.
The U.S.-Mexico framework is scheduled to last for 16 years and would be up for review every six years. However, Ginn is hopeful that Canada will be part of the mix before everything is finalized.
“I do think it is very important to make sure that Canada is part of this agreement. Canada is a large trading partner for us. If for some reason they don’t join it as well, I do that would be a negative moving forward,” said Ginn.