President Donald Trump’s trade team has come up with yet another way of trying to look tough while actually hurting America’s own firms.
As the administration seeks to renegotiate the North American Free Trade Agreement, Commerce Secretary Wilbur Ross says he is concerned about a purported decline in the quantity of US parts being used in imports from Canada and Mexico into the United States.
Ross, in a Washington Post opinion column, cited a new study by Commerce Department staff finding that the US content of manufactured goods imported from Canada, or the share of imported goods from Canada using parts made in the US, declined to 15% in 2011 from 21% in 1995, when NAFTA was first adopted.
US content for Mexican imports dropped to 16% from 26% during the same period, Ross wrote. “The data is available only until 2011,” the billionaire former steel magnate concedes, but he adds “there is no reason to think that the situation has improved since then.”
Ross’ solution? He resorts to the Trump administration’s usual crutch: trade protectionism. In this case, Ross wants to bolster “rules of origin” that would force manufactured goods to have a certain mandated content of US-made parts.
Here’s the problem, according to Caroline Freund, a senior fellow at the Peterson Institute for International Economics (where I used to work) and former World Bank economist. Ross “misses the main reason that the North American supply chain is valuable to the United States. The purpose of the supply chain is not to import from ourselves, but to lower production costs, making our firms more competitive globally,” Freund wrote in a blog post.
“Supply chains allow countries to specialize in the stage of production in which they are most efficient, increasing productivity and lowering prices for consumers,” she added.
NAFTA already has the “strictest rules of origin of any major trade agreement.” Therefore, tougher regulations on US content requirements could reverse some of the existing productivity benefits from the longstanding trade deal and hurt US manufacturing, Freund said.
This could disrupt supply chains in a way that hurts US firms and would also “perversely lead to less US content in our imports because more goods will be imported without NAFTA preferences or from other countries.”