NAFTA Out … USMCA In

NAFTA Out … USMCA In

It was argued during the last 8-10 years that it would be impossible to re-negotiate NAFTA (North American Free Trade Agreement), and even if we did, we could not get the changes we wanted for the betterment of the American labor force.  NAFTA, ratified in 1994, helped open markets between Canada, Mexico, and the US.

Most analysts have argued over the years it has been a mixed bag, with the United States usually on the losing end regarding market share and exports.  Before President Trump, many politicians ran against the benefits of NAFTA, and labor groups regularly have denounced it.

BOOM!  My how things have changed!  Out with NAFTA, and IN with the United States, Mexico, Canada Agreement (USMCA).

While the media refers to “cosmetic” changes, or that the President did not get the Canadians to concede on the main sticking points of dispute resolution, any fair-minded review of the terms and conditions leaves no doubt that this was a categorical victory for the country.  And the market response reflected that, with another record stock market high this week after the news was released.

Politically, the deal still must be ratified by each country’s legislature – the US, Canada and Mexico.  One would think that US Democrats would join Republicans in ratifying this new treaty, since they support so many of the new changes.  But in this polarized atmosphere, who knows?

What are the changes the USMCA will bring to North American trading rules?  Here are the Top Five:

Top-Five Changes coming out of the USMCA Trade Agreement

 5.“Lowered tariffs across the board among member states”:  The average tariff under NAFTA among the US, Canada and Mexico, when goods are sold across the border, is approximately 9.3% under.  The agreement would drive the average percentage tariff down to roughly 7% – this 2% decrease totals nearly $20 billion in savings for the consumer.   WINNER?  AMERICA! 

 4.”Higher Pay for Auto Workers”:  Starting in 2020, 30% of all automotive production must be completed by workers earning more than $16 an hour…in 2023, that number rises to 40% of all production completed by workers making over $20 an hour.  This will drive wages up for US producers and increase jobs as supply line savings will not off-set the increased pay for foreign labor.  This requirement did not exist under NAFTA.  WINNER? AMERICA!

3.“Auto parts must come from North American manufacturing”:  Under NAFTA, you could qualify for zero tariffs if only 62% of the automobile was made of North American parts.  now, the requirement has been upped to 75% must come from North America.  WINNER?  AMERICA!

 2.“Greater and more stringent protections for Intellectual property”:  While also needed with China, these new laws allow for law enforcement to stop and raid potential pirating by counterfeiters in intellectual property and increases the sentencing guidelines for such theft.  The easier approval for warrants will help prevent the IP from getting shipped to Chinese or other state-sponsored crime organizations in the first place.  WINNER? AMERICA!

1.“And Trump for the win, Canada caves in on US access to their dairy market”:  A long-time complaint of US farming was the near total banning of US dairy products.  That has been revoked under the USMCA.  As the USA Today put it:  “….Canada will ease restrictions on its dairy market and allow American farmers to export about $560 million worth of dairy products. That’s about 3.5 percent of Canada’s total $16 billion dairy industry.”  Canada, former President Obama, and scores of US officials said this was a red-line for Canada, they would never do it…BOOM!   WINNER? AMERICA!

It was not all a victory.  Any fair negotiations will have some compromises, or moments where we “agree to disagree.”  Another Canadian red-line was the Dispute Resolution process under NAFTA.  It has been grandfathered in to the USMCA despite American resistance.  The Canadians were unable to remove the current 25% steel tariffs Trump has imposed on all steel entering the country.  So not everyone got what they wanted.

But the American worker clearly got what they needed.

Trump Rejects Globalization at the UN

Trump Rejects Globalization at The UN

It would be remiss not to mention the on-going Supreme Court nomination hearings.  However, the highly charged politicized process in DC is something too partisan to make for a good, positive discussion this week.  We encourage our readers to watch and draw their own conclusions.

But the 24-hour news cycle always delivers stories that can, and, will affect your money. One of those stories was President Trump at the UN this week. Among the many topics he discussed, renouncing globalization was at the top of the list.

And good for him.

Love him or hate him, the President was right to assert the United States’ rejection of the ideology of globalization.  The term globalization does not have a singular meaning.  It can be the rather benign belief in open markets, free trade, and equal justice among nations.

However, that simplistic belief has no relation to how globalization has played out for American workers, and advanced economies, over the last 25+ years.  For those who have seen declines in their standard of living over this period of time, globalization has resulted in unfair trade, lost blue collar employment, and growing economic inequality.  It has also meant an allegiance to global institutions over US sovereignty.  That is morally, ethically – and Constitutionally – wrong.  Free trade is great, but not when only one side is trading freely, and the other is stealing your ideas and preventing you from selling in their market. To suggest such trade is “free” is laughable.

Despite the theoretical positives, globalization in its worst form has negatively impacted American workers and the American economy, and has been a direct threat to the supremacy of American constitutional law and American sovereignty.

Here is a Short History of the Globalization Movement Over the Last 25+ Years:

  1. “Bill Clinton pushed Chinese admission into the World Trade Organization (WTO) and NAFTA”: Globalization’s primary issues are related to trade.  The WTO is a treaty bound organization, and the successor to the General Agreement on Tariffs and Trade (GATT).  GATT and the WTO is an American created, American led organization whose sole purpose was to bid together like-minded Democratic and market economies in a rules-based global trading system.  China was a backward, third world nation in the late-90s.  But when Bill Clinton agreed to their admission to the WTO in 2000, the Chinese economy went into over-drive, benefitting from technological theft of American intellectual property and compliant US businesses.  It is not a democratic country and is not a market-driven capitalist economy.  The results have been predictable.  The US hoped that Chinese admission would help them become more democratic and lead to a freer Chinese economy.  It has not.
  2. “The first President Bush and Bill Clinton negotiated the free trade agreement known as NAFTA”: The second pillar of globalization was NAFTA.  The US Senate ratified the treaty between the United States, Mexico and Canada, in November 1993.  It was designed to create a large free trading bloc eliminating tariffs and expanding GDP for all three countries.  It did expand GDP, but Canada continued to place tariff’s on US agriculture and Canadian firms regularly steal US pharma intellectual property to sell generic drugs at a lower price.  Mexican labor is much cheaper due to few if any environmental or regulatory standards.  President Clinton also promised it would reduce illegal immigration, as expanding markets in Mexico would provide greater opportunities for Mexicans within their home country.  None of that proved true, and nothing more than an unequal marketplace has evolved.
  3. “Clinton argued, as did Bush 43 and President Obama since, that free trade would lead to more money in the pocketbooks of Americans”: On average, household incomes did rise over the last 25 years, but they remain stagnant when adjusted for inflation.  Not all of the rise can be attributed to globalization, and the primary concern is that the average rise in incomes does not reflect an equal distribution, as the highest 1% has been the primary beneficiary from globalization.  Blue collar and middle-income families have seen their wages either flatten, or falling behind (Economic Policy Institute, www.epi.org).  This argument from our leaders has been proven demonstrably false.
  4.  “Globalization has not led to greater global financial stability”: Free trade and the submission of our sovereignty to global institutions, has not led to greater financial stability and unencumbered GDP growth.  In fact, it has led to quite the opposite:

-From 1945 through 1971, there were no substantial financial crises.  This is best known as the “Bretton Woods system.”  This era was a system supported by the US dollar anchored to gold.

-From 1971 through 1980, developed nations went through a period of stagnation and recession due to Nixon’s removal of the dollar from the gold standard, oil shocks, etc., but no systemic crisis threatened western economies.

-From 1980-94, developed economies enjoyed unperilled growth through the Reagan Revolution, led by tax cuts and a “strong dollar” policy.  The 1987 stock market correction had no impact on the larger economy and was concentrated in financial markets for a short period of time.

-But from NAFTA 1994 forward, which most consider the advent of the globalization era, we have seen massive global shocks every few years.  they have included and not been limited to: (A) Asian currency crisis; (B) Russian ruble crisis; (C) Mexican peso crisis; (D) Dot.com bubble burst; (E) Long-term Capital Management bailout; (F) 2008 Financial Crisis.  And there are many more.

The basic tenets of globalization have proven untrue, and the consequences have been quite damaging to individual American families:

  1. China does not play by the rules, they do not enforce the same standards as western countries, and regularly steals US technological advances and intellectual property. They sell into our market with impunity, while restricting US companies from access to Chinese markets.  We were told they would become more democratic from this engagement.  This has proven untrue.
  2. Mexico was supposed to see an increase in GDP and business expansion which would slow illegal immigration into the United States. That has proven to be woefully untrue.
  3. Expanded wealth has not occurred, and US blue collar labor has been hollowed out by companies leaving to seek lower labor costs.
  4. There has been increased inequality, as most of the gains have gone to the upper end of the wage scale.

Globalization has proven to be a negative for US policy and more importantly US citizens.  The promises of increased wealth for everyone has only proven to serve as increased wealth for foreign countries on the backs of US intellectual property and innovation.  And actually, it has increased the wealth and power of a communist enemy of our country.

Globalization has not resulted in free trade or fair trade….it has only proven to be a bad deal for America.

 Whether you love the President or loathe him, on this policy, he is absolutely correct.  Globalization should be rejected by American leaders.

Great Week of News…With a Few Warning Signs- Trade Deal

Great Week of News…With a Few Warning Signs

The country lost a war hero this week.  Senator John McCain finally succumbed to the brain cancer he was fighting for some time.  He suffered unimaginable torment at the hands of the communists during the Vietnam War.  His bravery and heroism during that time is representative of the legendary greatness exhibited by the American war fighter, and we are all grateful for his service and what he went through on behalf of all of us.

His politics were quite combative with his own party, and to a significant degree with President Trump.  That conflict headlined some of the news media this week, along with the convictions of former Presidential campaign Chair Paul Manafort and Trump attorney Michael Cohen.

But if you search deep into the Google pages, or watch a number of cable news shows, then you can find some very positive and quite intriguing news stories that are good for the country and for the economy!

 I. Top 5 news headlines for this week:

5.“Deregulation leads to expansion of energy access and rare-earth minerals”:  It should be well-known now that the energy industry, coal mining, fracking, and much more has been deregulated.  These industries are required through numerous laws and regulation to be protective of the environment, but the regulatory regime had led to restrictions in market access and profitability.  The Administration’s deregulation initiative has spurred economic growth, jobs and innovation.  In addition, restrictions on the mining of rare-earth materials have been lifted.  Everything from clean energy batteries to advanced weaponry that the Pentagon relies upon were being imported from sources abroad because mining for them in the US had been restricted.  This upside-down, dangerous threat to national security has finally been lifted.   This is a win for capitalism, and a win for national security.

4.“Mexico and the United States agree in principal on a new trade deal to replace NAFTA”:  Much of our political unrest can be attributed to many factors.  Most agree social media has exacerbated or even served as the root cause.  But the primary reason has been economic:  free trade and globalization has driven corporations to search for cheap labor, and that has negatively impacted blue collar employment in the US over the last 25 years.  The free market was only working in one direction:  if you pursue cheap labor across state lines, then you cannot have protected markets or the theft of intellectual property, or you get trade that is neither free nor fair.  The result is a populist revolt.  President Trump rode that wave and his primary target – going back to the early 90s – was NAFTA.  The trade deal between Mexico and the US this week probably means the end of NAFTA as we knew it, and that drove the market surge this week.

3.“Canada rushes to get a deal before its too late”:  Sound and fury, signifying…nothing.  Europe, Mexico, now Canada…everyone wanted to stick their chest out and say how they weren’t going to let the Americans dictate terms – and then we dictated the terms.  The Canadian Foreign Minister literally got on a plane to come to Washington after the President and Mexico announced their new trade agreement.  Simply put – apparently lost on the establishment and the elites of the last 26 years – no one can afford to NOT have a trade relationship with the country that has the largest economy, the freest economy, the most innovative economy, the fairest rule of law (although weakened), the largest multi-national banks, and the deepest capital markets.  Simply put – apparently lost on the establishment and the elites of the last 26 years – pursuing a strategy of economic confrontation with the United States has always been suicidal and self-defeating.  Canadian Prime Minister Justin Trudeau will be on TV claiming they prefer no deal to a bad deal…and shortly will sign a good deal for everyone that puts the American worker first.

2.“Nasdaq 8000”:  For the first time in the tech-index’s history, it broke 8000 on the big board.  While previous tech high’s scare investors – such as the dot.com bubble – the technology market has matured since that time, with larger and a more diverse set of companies which drive valuations.

1.“Growth revised upward”:  Not 4.1%, but actually 4.2% GDP growth in quarter number two.  This growth is predicated on actual deregulation, tax reform, and strong dollar policies.  It is based upon wage growth (2.8% year-over-year, first time since 2007) and actual economic activity as opposed to printing money or zero interest rates.  What goes up must come down, but the growth we are seeing is positive business expansion, it represents a healthy economy.

Not everything is rosy or hunky dory – the Mueller investigation never ends….China shows no signs of relenting in this trade war…Russian warships are back in the Mediterranean for the first time since 1990…the Congress remains incapable of addressing our debt problems nor even passing a regular budget…hopes for a deal in North Korea are waning…and, we are due for a market correction.

But America’s economic vitality and strength, and our role as the “indispensable nation,” is allowing the capitalist engine to power on as we near the end of 2018.