Mains Paper 2: IR | Effect of policies & politics of developed & developing countries on India’s interests, Indian diaspora.
From UPSC perspective, the following things are important:
Prelims level: NAFTA
Mains level: U.S. dominant approach in the world economy and how to deal with it
US-Mexico NAFTA deal
- The United States and Mexico have reached a breakthrough bilateral trade agreement replacing the decades-old North American Free Trade Agreement (NAFTA)
- This is after Mexico agreed to concessions demanded by the Donald Trump administration
- The U.S.-Mexico bilateral trade deal comes in the aftermath of President Trump’s statement in June that he might enter into separate trade agreements with Canada and Mexico, thus effectively junking the tripartite NAFTA deal
- U.S. has also invited Canada to join talks for a renegotiation of trade terms in favour of U.S. interests
What’s in the new deal?
- 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, 40-45% of such content must be manufactured using labour that costs at least $16 an hour
- The 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.
Lessons from this deal
- 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 against them
- There can be no doubt that Mr. Trump’s protectionist trade policy, including the current deal which increases restrictions on cross-border trade in order to protect U.S. jobs, 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
Why accept defeat?
- Retaliatory tariffs can only cause further harm to the world economy by increasing the burden of taxes on the private sector, which is crucial to spur growth and create jobs
- Further, there is no reason for America’s trading partners, in an attempt to protect their domestic producers, to repeat Mr Trump’s mistake of depriving domestic consumers of access to useful foreign goods
- The right response to Mr Trump’s trade war will be to abstain from any mutually destructive tit-for-tat tariff regimes while simultaneously pushing for peace talks
North American Free Trade Agreement (NAFTA)
- The North American Free Trade Agreement is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North America
- The agreement came into force on January 1, 1994
- The goal of NAFTA was to eliminate barriers to trade and investment between the U.S., Canada and Mexico
- NAFTA has two supplements: the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC)
- NAFTA established the CANAMEX Corridor for road transport between Canada and Mexico, also proposed for use by rail, pipeline, and fibre optic telecommunications infrastructure
- A study in 2007 found that NAFTA had “a substantial impact on international trade volumes, but a modest effect on prices and welfare”
- If the original Trans-Pacific Partnership (TPP) had come into effect, existing agreements such as NAFTA would be reduced to those provisions that do not conflict with the TPP, or that require greater trade liberalization than the TPP