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August 29, 2018
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What is the issue?

  • The U.S. has initiated a global trade war by steeply raising tariffs.
  • But in the midst of this tense context, a bilateral deal has been reached between the U.S. and Mexico, which offers some hope for reducing tensions.

What is the context of the deal?

  • NAFTA deal was tripartite agreement between “Canada, U.S. and Mexico” that was signed in 1994 and was operational till recently.
  • President Trump had called for renegotiating the terms of the deal, which he felt was discriminatory to the U.S. and causing loss of business.
  • In June 2018, Mr. Trump had stated that he was inclined to sign two different agreements with Mexico and Canada as a replacement to NAFTA.
  • U.S. and Mexico recently reached a bilateral trade agreement that will replace the decades-old North American Free Trade Agreement (NAFTA).
  • In this context, with the deal with Mexico over, the U.S. has now invited Canada to join talks for a renegotiation of trade terms.

What are the specifics of the current deal? 

  • This has come up after Mexico agreed to some concessions demanded by the Donald Trump administration in the U.S.
  • According to the new agreement, 75% of all automobile content must be made regionally, which is higher than the current level of 62.5%.
  • Further, the agreement mandates that 40-45% of such content must be manufactured using labour that costs at least $16 an hour.
  • U.S. hopes that this will discourage manufacturers from moving their facilities to Mexico, where labour is available at rates lower than in the U.S.
  • Notably, U.S. stocks rallied after news of the deal, with the Nasdaq Composite index moving above the 8,000 level for the first time ever.

What are the larger implications?

  • The market reaction was probably a sign of relief, amid hopes that tit-for-tat tariff wars between the U.S. and its trade allies could now draw to a close.
  • This is also significant as Mexico had earlier joined hands with other economies such as Canada, China and EU to impose retaliatory tariffs on U.S.
  • Mexico’s decision could set an example for other countries which have resorted to retaliatory tariffs to deal with Mr. Trump’s aggressive trade war.
  • Notably, China has been at the forefront of this approach, slapping tariffs on several U.S. goods, together worth billions of dollars.

What is the way ahead?

  • Mr. Trump’s protectionist trade policy, including the current deal which increases restrictions on cross-border trade, is bad for the global economy.
  • However, the best way to win the trade war against the U.S. may simply be to accept “defeat” by refusing to double down on retaliatory tariffs.
  • This is born out of the reason that retaliatory tariffs can only cause further harm to the world economy by increasing the burden of taxes.
  • This will disproportionately harm the private sector, which is crucial to spur growth and create jobs in the economy.
  • Further, to repeat Mr. Trump’s mistake of depriving domestic consumers of access to useful foreign goods, and this isn’t desirable.
  • While protecting the domestic businesses is indeed one ground on which countries may impose tariffs, it needs to be judiciously used.
  • The right response to Mr. Trump’s trade war will be to abstain from any mutually destructive tit-for-tat tariff regimes, while pressing for better deals.

 

Source: The Hindu

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