Negotiators agreed late on Sept. 30 to sign a new trade accord, the U.S.–Mexico–Canada Agreement (USMCA), which will replace the North American Free Trade Agreement (NAFTA). The historic win, as Trump puts it, clears the decks for the administration to now turn its attention to Beijing.
Trump touted his tariffs as a useful negotiation tool, during a press conference to celebrate USMCA on Oct. 1.
“By the way, without tariffs, we wouldn’t be talking about a deal, just for those babies out there that keep talking about tariffs. That includes Congress,” he said.
According to Trump, U.S. tariffs are clearly working and will eventually force China into making concessions at the negotiating table.
“We have a lot of catching up to do with China,” he said. “We’re using tariffs very successfully to negotiate. And if we’re unable to make a fair deal, then we’ll use tariffs.”
However, he believes it’s too early to talk to China, since officials there have dragged their feet on agreeing to end the Beijing regime’s unfair trade practices.
“China wants to talk very badly. And I said, ‘Frankly, it’s too early to talk.’ Can’t talk now, because they’re not ready,” Trump said.
“They’ve been ripping us off for so many years. It doesn’t happen that quickly. And if, politically, people force it too quickly, you’re not going to make the right deal for our workers and for our country.”
The USMCA contains a clause that bars any of the members from entering into a separate free-trade deal with China.
“Entry by any Party into a free-trade agreement with a non-market country, shall allow the other Parties to terminate this Agreement on six-month notice,” the agreement text says.
The use of the phrase “non-market country” is a clear reference to China, as, last year, the Commerce Department reaffirmed it was a non-market economy.
Canada and China have been talking about a possible free-trade deal, although formal negotiations have been put on hold.
According to Canadian media, the USMCA gives the United States “unprecedented leverage” over its partners’ relationship with China. In practice, Washington can tear up the trilateral pact if Canada or Mexico strikes a deal with Beijing.
The agreement also includes a provision that targets currency manipulation, a trade tactic China has been using for years to boost its exports by undervaluing its currency.
“It’s a great win for the president and a validation of his strategy in the area of international trade,” a senior administration official said on Sept. 30, adding that the new deal “has become a playbook for future trade deals.”
Senate Minority Leader Chuck Schumer (D-N.Y.) also welcomed the rewrite of NAFTA.
“As someone who voted against NAFTA and opposed it for many years, I knew it needed fixing. The president deserves praise for taking large steps to improve it.”
After the midterms, pressure may grow on Trump to end the tariff war, according to Harald Malmgren, economist and senior trade negotiator for U.S. presidents John F. Kennedy, Lyndon B. Johnson, Richard Nixon, and Gerald Ford.
“The Chinese side decided to wait until its retaliatory trade measures had a greater effect on various U.S. industrial and agricultural interests on voters in the midterm elections,” he said.
The trade tension between the United States and China has escalated as Trump announced in September that his administration would proceed with imposing tariffs on an additional $200 billion in Chinese goods.
Trump also warned that if China retaliates against the U.S. farmers and other industries, he would impose tariffs on another $267 billion in Chinese imports.
Trump’s new tariffs came as a surprise to Chinese leaders who called off a planned bilateral meeting in late September.
Malmgren believes a long-lasting tariff dispute will pose a threat to supply chains and affect the investment plans of some of the world’s biggest industrial enterprises.
“For example, Japanese and German automotive producers have, in recent years, been expanding production of vehicles inside the United States not only to supply American buyers but to export … to other markets around the world, including China,” he explained.
Mercedes and BMW, for example, make most of their SUVs in the southern United States, he said, with two-thirds of that production exported to other countries. BMW announced in July that it would move production for some of its SUVs out of the United States as a result of new tariffs.
China, however, may soon give in to the United States’ trade demands and end the tariff wars as its economic troubles grow.
Chinese Credit Crunch
The start of a trade war between the United States and China comes at a difficult time for the Chinese economy. Domestic economic growth is slowing down and tariffs are expected to put more pressure on growth.
“There is clearly softening in the Chinese economy,” Kurt Campbell, a former assistant secretary of state for East Asian and Pacific Affairs said at an event hosted by the Center for Strategic and International Studies.
“There are credit crunches. A lot of available money has gone to the more inefficient state-owned enterprises. A lot of more efficient small and medium-size firms are struggling now and anxious,” he said.
Nevertheless, China is still determined to wait, he added.
They aren’t yet prepared to take the structural reforms that the Trump administration is seeking in such as abandoning Made in China 2025—a strategic plan for taking the lead in several high-tech fields—moving away from activities such as forced joint ventures in exchange for market access, and technology and IP theft, he said.
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