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OPINION: Protectionism disguised as free trade agreements in new Nafta deal

OPINION: Protectionism disguised as free trade agreements in new Nafta deal

PRETORIA – Just over a decade ago trade agreements were seen as beautiful symbols for integrating markets, not only for the countries concerned but for the entire world. At some point, there was a strong view that the more economic and political agreements in the world system, this would be good for multilateralism and trade. Thus far, hundreds of these agreements in different parts of the world. And Africa is also moving towards a continent-wide African Continental Free Trade Area (AfCTFA) agreement.

To this day, the Managing Director of the International Monetary Fund (IMF) Christine Lagarde still speaks highly about the benefits of free trade and trade liberalisation. She says it has improved productivity, enhanced innovation and facilitated better coordination of global supply chains as well as significantly reduced the cost of goods. Pali Lehohla, former Statistics South Africa head, also thinks free trade contributes to employment creation and increased incomes.

But the United States in the last few years doesn’t share this view any longer.

The purpose of free trade agreements is taking another turn and is quickly drifting away from the notion of ‘shared benefits’. As from Monday, 1 October 2018, Canada, Mexico and the United States have a renewed the regional trade agreement to replace the old North American Free Trade Agreement (NFTA), but with on goal in mind: To manage China and to frustrate China’s “brash economic ascent.” Sinophobia is written all over this new deal. This prompts South China Morning Post’s Chi Wang to say, “As US fears of China grow hotter, those with Chinese backgrounds face the coldest war yet.”

The new United States-Mexico-Canada trade deal (USMCA) contains a number of clauses, which US president Donald Trump calls them “upgrades”, that won’t take a genius to see who is targeted. In addition, the agreement clearly demonstrates what the US has in mind, and also what it would prefer going forward as far as trade matters are concerned.

Pali Lehohla, former Statistics South Africa head, also thinks free trade contributes to employment creation and increased incomes. Photo: Thobile Mathonsi/African News Agency (ANA)
Pali Lehohla, former Statistics South Africa head, also thinks free trade contributes to employment creation and increased incomes. Photo: Thobile Mathonsi/African News Agency (ANA)

The rise of a flying dragon

The hype about free trade agreements occured long before China expressly declared its intentions of becoming a global economic superpower. In fact, China was leading in hosting some of the world’s companies who produced their products there, and these products were promptly sent straight to overseas markets without even passing the producer’s home country. Everyone seemed content with China’s status as the factory of the world. Beijing was flying high and enjoyed unprecedented high growth rates. It wasn’t long before China had accumulated stashes of cash (estimated at U$D3.14tn in January 2018) and expertise to turn the world upside down.

It doesn’t look like some of the leading economies such the Japan and the United States were really expecting a backlash. Suddenly, China dislodged Japan to become the world’s second largest economy. Not only that, Beijing held more US dollars as cash reserves than any country and became a largest holder of US bonds worth U$D1.18tn as at June 2018.

However, China’s foreign policy remained slightly timid but it wasn’t afraid to insist on its ‘one China policy’ to shut out Taiwan. It’s preoccupation was mainly in South China Sea and never hid its irritation with the presence of US troops in the Korean Peninsula. Thus, China was only prepared for showdowns with its neighbors over tiny an insignificant islands. The heat of the dragon’s flames was limited in far flung places.

But in recent years, China announced its intent through its economic might rather than guns and soldiers. It not only bought assets abroad but its companies increased their investment stakes and went on a huge infrastructure development drive in all regions of the world. Chinese companies and loans have certainly changed the global political landscape as more developing countries turn their backs on the West and its institutions.

The ‘Look East policy’ has left traditional powers not only frustrated but also without a cogent response to deal with Chinese economic insurgency. They were truly stunted and the only thing they could do was to discredit China for its human rights record and bad behavior. Unfortunately, not everyone thinks China has a concrete plan to deal with the US and Trump in particular. Wang even suggests that the Chinese government “should certainly consider how their approach to foreign policy might antagonise the US.”

The ‘Look East policy’ has left traditional powers not only frustrated but also without a cogent response to deal with Chinese economic insurgency. Photo: Pixabay
The ‘Look East policy’ has left traditional powers not only frustrated but also without a cogent response to deal with Chinese economic insurgency. Photo: Pixabay

End of détente among global powers?

In my analysis of power relations between global hegemonies, I always maintained that they sort of give one another space and avoid direct confrontation. For example, Russia will be left alone to harass its neighbors and anyone who challenged the Kremlin’s authority in the area it considers its exclusive sphere of influence. France maintained tight control over West Africa.

However, this unwritten rule seems to be evaporating of late, especially when Russia and the US supported different sides in the Syrian conflict. Russia also managed to achieve what it always desired: to disrupt the North Atlantic Treaty Organisation (NATO). Currently, Turkey is at loggerheads with its long time ally the US, and accuses Washington of economic sabotage. Though China has one of the most formidable armies, it generally elects to stay out of wars. It prefers its money diplomacy to disrupt the world order, and the US naturally feels worst pains.

As top nations, nonetheless, the US and China avoided open, bare-knuckle bouts. Fights mostly took place in controlled settings like in United Nations Security Council (UNSC) and the World Trade Organisation (WTO). This was not going to last for long, Donald Trump was elected as the US president in 2016. This was a masterstroke on the part of the US as it immediately launched Trump to engage in street fights with a view of taming the dragon.

The days of ‘economic diplomacy’ were over in a whim as Trump nullified potential trade deals with several countries and removed the US from the climate change negotiations. He also sounded a warning shot to anyone who is “taking advantage” of the US, from China to allies like Canada and Europe. Trump generally expressed reservations at the multilateral framework as a whole – it was clear from day one that the world’s third war would be economic rather than a physical one with bombs and submarines.

The United States confronted China for dumping its products in its market, and told its companies to bring back jobs. Trump insisted that not only US companies were targeted but foreign ones too. For example, Toyota and Ford are invested heavily in Mexico and their manufacturing plants produce cars for the US market at a lower cost due to cheap labour. Trump wanted to hear none of this and ordered the likes of Ford to pull back on their intentions to invest more money in Mexico.

Although Mexico signed the NAFTA in 1994, Trump’s hostilities towards the southern neighbor indicated that Washington had no time to waste on agreements that were perceived not to be working in America’s favour. Southern states like Arizona, New Mexico and Texas asked Trump to clamp down on the influx of migrants from Mexico and the rest of Latin America. Without much delay, Trump announced a huge plan to construct a multi-billion dollar wall to curb migration.

A significant step that the US took was to force a renegotiation of the NAFTA agreement with Canada and Mexico. Photo: Pixabay
A significant step that the US took was to force a renegotiation of the NAFTA agreement with Canada and Mexico. Photo: Pixabay

The new United States-Mexico-Canada trade deal (USMCA)

A significant step that the US took was to force a renegotiation of the NAFTA agreement with Canada and Mexico. At the height of the negotiations in December 2017, the Washington-based Brookings Institution declared that the United States was worried about China’s increasing influence in the world, particularly from the economic side of things. The institution postulated this “fear” was likely to shape US economic relations with other countries, individually and or as a group.

Some of the key highlights to suggest that the USMCA sets a bad precedent for future trade agreements are:

a) Under rules of origin, the agreement determines “how much value of a car needs to be made in the region.” Bloomberg reasons that this measure aims “to keep out Chinese inputs and encourage production and investment in the U.S. and North America.” May be to placate Mexico, approximately 40% of those cars “would have to be made by workers earning at least $16 an hour — three times more than Mexico’s minimum wage.”

Flavio Volpe, president of Canada’s Automotive Parts Manufacturer’s Association also supports this view by saying, “The US seems focused on keeping Chinese imports from gaining real market share in the US.” Volpe adds that this a “blunt protectionist stick used by this administration may end up creating a coalition of major trading partners that will be difficult for Chinese carrots to compete with.”

b) The agreement specifically compels the parties to give three-months’ notice should they intend to commence with start trade negotiations with a “non-market economy.” Although there is no mention of China by name, it is more than apparent that this clause is directed at Beijing. Failure to do this may allow Washington to pull out of the agreement.

It has been a while that the US has expressed discomfort in ‘Chinese capitalism’. The Brookings Institution noted that the US would push for exclusion of Chinese state companies in public contracts in the three countries. In December 2017, the US supported the European Union at the WTO, where it argued that the Chinese government’s “role in the economy and its relationship with markets and the private sector results in fundamental distortions in China’s economy.” That essentially formed a convenient launchpad for the ongoing trade war between the United and China.

Already the tariffs imposed by both the US and the European Union have cost China billions of dollars in exports. The Chinese foreign ministry has nevertheless argued that “the concept of the so-called non-market economy can be found in no multilateral WTO rules, since it was created by several countries during the Cold War and only incorporated into domestic laws of a scanty few of the 164 WTO members.”

c) The USMCA agreement “prohibits its members from seeking to boost their economic competitiveness by devaluing their currencies.” Trump has long maintained that China manipulates its currency to gain competitive advantage.

Future agreements with the United States

The USMCA agreement is evidence that free trade agreements are changing from what they were always said to be. At the heart of this agreement is protectionism. Of course the missiles are now directed at Beijing but it takes no genius to figure out that other countries will be affected too. With USMCA now complete, Trump will turn to African Growth and Opportunity Act, or AGOA. South Africa, for example, exports vehicles to the US and is likely to be negatively affected by the new deal.

As things stand, the US will start negotiations for bilateral economic negotiations with Japan and the European Union, after it concluded yet another agreement with South Korea. The protectionism efforts to frustrate China is set continue through alliances that will polarize the world. Cornell University’s Eswar Prasad argues that “If the U.S. were to strike new deals with its major trading partners, many of which are also key trading partners of China, Beijing could feel increasingly cornered.”

Emel Kan of The Epoch Times reports that Trade chiefs of the United States, Japan, and the European Union on 25 September 2018 “agreed to work together to tackle China’s unfair trade practices…, and to reform World Trade Organization (WTO) rules that are not effective.” Basically, the interest is to address and set new rules to govern industrial subsidies and state-owned enterprises.

It is safe to conclude that the USMCA deal “does show China and others that the Trump administration is willing to conclude new trade deals as long as they address core U.S. concerns,” argues political analyst Terry Haines. But it would also be interesting to learn in detail how the new trade agreement with is neighbours will impact Mexico’s economy.

The agreement commits to allow the parties “to sanction each other for labour violations that impact trade.” The old NAFTA led to a drop in wages and destroyed key sectors in Mexico. It is unlikely that the US will ever punish US companies for violations. Unionization, collective bargaining and protection of basic labour rights are not among the strong points of the United States.

Besides the United States’ clear intentions of keeping out China from its ‘backyard’, Mexico City appears very prepared, at least for now, to bend backwards in order to impress its powerful neighbor. Close to 80% of the Mexican economy depends on the United States. When the heat mounts, Mexico’s president-elect, Andrés Manuel López Obrador, will scream loudest as always.

Siyabonga Hadebe is an independent commentator on socio-economic, politics and global matters based in Pretoria.

The views expressed here are not necessarily those of Independent Media.

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