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International Relations

After more than a year of intense negotiation, the U.S., Canada and Mexico managed to arrive at a revised trade agreement on Sunday to replace the quarter-century-old North American Free Trade Agreement (NAFTA). Even though the deal does not do anything new to promote the cause of free trade among the North American nations, it achieves the objective of averting any significant damage to the international trade system. Sadly, this is the best anyone could possibly hope for in the midst of the global trade war that began this year. When it comes to the finer details, the U.S.-Mexico-Canada Agreement (USMCA) makes several changes to NAFTA, which U.S. President Donald Trump had promised to scrap. The most prominent changes are the tweaks to production quotas applied to Canada’s dairy industry, which were intended to help protect it by restricting supply. Under the new deal, Canada will have to allow American dairy producers to compete against locals, a move that will favour Canadian consumers. The U.S. agreed to retain Chapter 19 and Chapter 20 dispute-settlement mechanisms as a compromise. This will help Canada and Mexico deal with protectionist duties imposed by the U.S., often under the influence of domestic business lobbies, against their exports.

Not all the amendments, however, are congenial to the prospects of free trade. Many are simply hard compromises that Canada and Mexico may have made just to defuse trade tensions with the U.S. And not unlike other free trade deals entered into by governments, the present one attempts to micromanage trade in a way that benefits specific interest groups at the cost of the overall economy. The new labour regulations and rules of origin will add to the cost of production of goods such as cars, thus making them uncompetitive in the global market. The USMCA mandates a minimum wage that is above the market wage on labour employed in Mexico, yet another move that will make North America a tough place to do business. Foreign investors may now have fewer protections from unfriendly local laws as the accord does away with resolutions through multilateral dispute panels for certain sectors. But it is its potential to end up as a double-edged sword for the U.S.’s major trading partners that Indian policymakers may find instructive. Announcing the USMCA, Mr. Trump signalled he would now extend his ‘all or nothing’ approach to resetting trade ties with the European Union, China, Japan and India. Terming India “the tariff king”, he said it had sought to start negotiations immediately, a move he reckoned as a bow to the power of tariffs that a protectionist U.S. could wield. In dealing with an emboldened Trump administration, India’s trade negotiators will now have their task cut out if they want to protect exporters’ access to one of the country’s largest markets for its services and merchandise.

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