On Wednesday the Commerce Department Secretary Wilbur Ross said that the department will impose penalties on Canadian lumber and Mexican sugar if the US is unable to come to a settlement with those countries over alleged trade violations.
This is bad.
It’s bad because the US still has to enter NAFTA renegotiations with these two countries. And while the Trump administration may think that this kind of talk tough puts the US in a position of strength, it will very likely do just the opposite. It will weaken the US in negotiations for a deal that Commerce Secretary Wilbur Ross has said we must have Congress confirm by July 2018.
Strategically the timing here is off as threats before negotiations have even started, make this kind of “fast-track” Ross wants unlikely.
There are two reasons for that – politics and time. The Trump administration has turned public opinion against the US in both countries, and – especially in Mexico – that could mean dealing with politicians unwilling to suffer insults or make compromises with a former regional friend.
Got sugar? Got Wood?
A little background on the Canadian lumber and Mexican sugar issues.
The US is accusing the Canadian government of illegally subsidizing its lumber industry. Canadian timber is logged on government lands, and the lack of private competition makes it cheaper than American lumber. The Trump administration thinks that’s unfair so it put a 20% tariff on the lumber that’s used to build American houses.
On the sugar front, Ross has given Mexico until June 5th to stop subsidizing its sugar an industry – an allegation Mexico denies. The US’s gets 50% sugar of its sugar from Mexico, which is some of the cheapest on the market, and this move would likely raise prices here at home.
Normally, when countries have trade issues with one another they take their issues to the World Trade Organization. There, these cases could take years to resolve, and in the case of US complaints about Canadian lumber, we’ve lost every single time.
Now, if the negotiations fail and the US acts aggressively, Canada or Mexico could sue us through the WTO, where it would take up to 2 years for the body to authorize proportional retaliation. They could also do what we did and just impose their own duties in response.
Lee Branstetter, a trade expert and professor of economics at Carnegie Mellon, doesn’t think they’ll do either. Instead, they’ll save their firepower for NAFTA.
“I doubt there would be much of a retaliation until NAFTA renegotiation is under way. If that hits some roadblocks then we could be in for some serious blowback. A very large fraction of our exports go to Mexico or Canada,” he said.
Got time? Got pride?
Commerce Secretary Wilbur Ross has said the ideal window to complete NAFTA renegotiations is late December 2017 or January 2018, but having prickly people on the other side of the negotiating table makes it more likely that it will take longer and hit snags.
“The big danger in the renegotiation is that the U.S. asks for more concessions than the other nations can deliver,” Branstetter said.
Mexico, its people and its politicians are especially tired of Trump’s rhetoric. Trump bashing has basically become a national pastime. That bodes well for anti-Trump politicians in the country’s legislative elections in mid-2018. This also happens to be around the time the Mexican legislature would need to pass a NAFTA deal.
“The leading candidate for the Mexican presidency is a fiery leftist who would love to cast himself as the defender of Mexican honor against the imperialist Yankees,” said Branstetter. “The current incumbent party can only go so far without basically handing the keys over to the leftist front-runner, Mr. Andres Manual Lopez Obrador. If the Trumpistas push too far, then they run the risk of either blowing up NAFTA or looking incompetent and weak.”
Ross has acknowledged that the “closer you get to it [Mexican elections] the more complicated it [passing NAFTA] would becomes.”
And lest we forget, the Canadians are really upset about this lumber thing too. Putting a 20% tariff on that good, which is what the Trump administration has done, may not mean much to us – but to Canadians, it’s a national insult. As a result, Canadian public opinion of the US is at a 35-year low.
What has happened here is very simple. We turned what should be a more friendly, transactional negotiations between neighbors into a point of national pride. The Trump administration has made something very emotional out of what could be far more rational.
All that’s going to do is take precious time Ross doesn’t really have. Strategically, we’re blowing it. Meanwhile, US companies, and the stock market in general, hang in the balance.