Free Trade or Managed Mercantilism

Mary Anastasia O’Grady’s WSJ coverage of Nafta talks included the following tidbit

auto-sector “rules of origin,” which dictate how much of a vehicle must be made in North America to qualify as duty-free when it crosses continental borders. 

In May, Team Trump proposed a new North American content requirement of 75%, up from the current 62.5%. It also wanted a new requirement that 70% of the steel and aluminum in Nafta vehicles be North American and new wage regulations that would require 40% of the value of North American cars and sport-utility vehicles—and 45% of Nafta trucks—be produced by workers making between $16 and $19 an hour. 

Mexico countered with 70% North American content, a 30% regional steel requirement and 20% regional aluminum. Market-based labor rates are important for Mexican competitiveness, but Mexico showed flexibility by proposing $16 an hour for 20% of the value of vehicles it makes. The U.S. rejected that offer. Now the two sides are trying to find middle ground.

Nafta and the like are often called “free trade agreements.” Economists like me wonder, why does that take tens of thousands of pages? “We do not charge border taxes (tariffs), nor restrict quantities, nor will government purchases favor American companies.” “We do the same.” Done. That’s free trade. This little snippet reminds us what trade pacts really are.

Of course, they are far better than the alternative, in which everything is tariffed, protected, managed, and individually negotiated.