The administration of Donald Trump seems committed to weakening, if not ending, the North American Free Trade Agreement (NAFTA), citing the decline in the auto industry as an example of the deal’s supposed failure. As U.S. Secretary of Commerce Wilbur Ross noted in The Washington Post, the percentage of auto imports from Mexico that used inputs from the United States had actually dropped post-NAFTA, and therefore, he argued, the free-trade agreement is broken. The Trump administration has now proposed raising the “rules of origin” for vehicles under NAFTA from 62.5 to 85 percent. In other words, at least 85 percent of a car must be made in a NAFTA country for that car to qualify as duty-free.
This argument prompted no small debate about Ross’ methodology and data selection, but putting that aside, there are three fundamental reasons why Secretary Ross’ thesis is simply bad for the economy.
First, a focus on trade balance and the performance of one sector means the United States evaluates a trade deal based not on rules but on results. A rules-based approach allows governments to focus on standards, transparency, and enforcement to keep the trading environment fair. A results-based approach, on the other hand, signals that even if trade is fair, a government will thwart competition if it is not happy with the results. This is not a defense of the U.S. economy but a surrender. Instead of telling the world that the United States is interested in the best technology and ideas from around the world, a results-based approach announces an interest in purchasing foreign products and ideas only to the extent that it can sell the same value of goods elsewhere. The United States’ ability to grow its economy would be capped not by its aspiration or appetite, but by other countries’ appetites. It can only be smart to the degree that its trading partners are smart.