Does the USA need USMCA?

North Americans are wondering if we will still have a USMCA?

North Americans are wondering if we will still have a USMCA?

Trump is working to reset the US trade environment back to a “USA only” economy.

So, what’s behind this thinking, and what are the possible future options and outcomes…...

The History ….

As we will explain, the reset to a “USA only” economy is an understandable but somewhat drastic reaction to the failed western national policies of the past.

Prior to World War 2 the USA had significantly high tariffs on most forms of international trade. But immediately after World-War 2 the USA placed national economics second to geopolitical imperatives, and lowered tariffs and some capital controls to help re-build the post war nations devasted by war, and to prevent some nations from migrating to the influence of communism.

A few decades later the economists of the day promoted the concept of neo-liberalism that pushed for all remaining national tariffs across all nations to be eliminated to start a new world order of global free trade and the mass financialization of national economies by encouraging the free flow of capital across the globe. They promised that global free trade “will make all boats rise together” with a promise to maximise prosperity across the whole global trading environment, and they promised that overall global poverty would be eliminated, and international trade would reduce wars and conflicts.

In the same timeframe global logistics technology via modular containerization for sea, rail, and road transportation enabled the growth of global supply chains via the efficient movement of physical goods.

Then the profit seeking corporations took full advantage of the huge labor cost differential between the western economies and the emerging nations and used labor arbitrage to transfer massive amounts of manufacturing capacity from the west to the rest.

In my book Take Back Manufacturing I explain that none of the promises of globalization have been kept.

The notion of “all boats will rise together” is now a sick joke for most citizens in the Western world.

In less than one lifetime, we have experienced the destruction of our industrial sectors in Western societies, and the significant reduction of western prosperity and considerable loss of national autonomy and sovereignty.

After 45 years of these policies global trade has increased 8 times, but global wealth has only increased at best 3 times. So Global trade has been poor at wealth creation but very good at wealth transfer.

The result is that the emerging economies have significantly benefited from this trade-based wealth transfer, while wealth and prosperity in the mature western nations has flatlined or worse.

In the western nation’s this uncontrolled globalization of trade and immigration has caused de-industrialization with lower wages, insecure employment and striking inequalities. It has resulted in declining national productivity and prosperity with national and citizen debt levels and social issues rising.

Yes. It has reduced global poverty, but it has also added more than 2 billion under-employed people to the global workforce, who now have increased expectations for improved prosperity, with many becoming global migrants seeking illegal entry to mostly the western nations, with significant stress on the western nations security and social support systems.

Further, the significant adoption of global free trade has extended our supply chains and added inventory and waste to our businesses and forced the significant depression of interest rates that has destroyed the balance between investment and spending, while reducing the value-added content of our Western economies and enabled the growth in stateless corporations.

In retrospect, we appear to have placed the drive for uncontrolled global free trade ahead of common sense and sound economic principles.

Today, contrary to the past promises by those that advocated a new world order, nations are far from closer together. We have even more wars and conflict, and democracy as a political ideology has declined. Meanwhile, the ascension of new major powers, such as China and others who have benefited from the global free trade journey are clearly adopting non-democratic political models, and geopolitical tensions are increasing not decreasing.

So, it should be no surprise that the western citizen’s tolerance for global free trade has evaporated. New national western governments are more nationalist in their policies and are getting increasingly strong support from their citizens to reverse global free trade, global multilateral rules, and all forms of immigration.

Many western citizens want no more talk about a “post nation state” or a “post industrialized society”.

They just want their nation back!

The New USA Leadership Direction

President Trump has clearly outlined and reinforced in the presidential inauguration address and in other speeches that Nationalism is the political ideology, and this will shape the economic trade environment that the new USA leadership will adopt!

President Trump believes that there is an urgent need to reverse past trade policy mistakes and disconnect the US economy from unsecured and uncontrolled global free trade, and from unfriendly global actors.

Trump will enforce a trade bloc strategy of reducing foreign trade unless it’s a clear benefit to his own citizens. He will strive using a true trade bloc employing significant tariffs to limit all non-essential and non-beneficial trade outside of the US borders.

Also, the localization of trade and any beneficial exports will be encouraged via subsidies and internal tax reductions.

It will force reshoring closer to USA consumers and mean de-globalization and the reduction of significant international trade with the USA, and it will certainly ensure that the USA will remain the largest national economy.

Its clear that the current USA leadership is reversing the past support for global free trade with the intention of ensuring that US business and its citizens will always come first.

So, it’s clear that President Trump and the new US administration does not subscribe to the past doctrine of the “new global order” that considered global trade to be a god given right to expect from another nation.

Many economists have traditionally been married to the religion of global free trade and free-market comparative advantage ideology, but now some economists do agree that international trade should not be a God-given right. It must only be undertaken if it benefits national citizens, and not to serve some blind geopolitical feel-good ideology at the expense of national prosperity.

The days of unlimited US benevolence by allowing free multilateral access to the US market and its high value consumers that started immediately after WW2 and was later accelerated with global neo-liberalism is now over!

The New USA Trade Tactics

The US government trade policy will add national border tariffs to ensure firm economic conditions for significant reshoring back to a more localized trade and business activity.

Even without these government trade policy inducements the business sectors are already pursuing significant reshoring plans to produce products and provide services closer to their US consumers. This is largely being driven by the realization that long global supply chains increase business costs. And more recently they are anticipating the introduction of new Industry 4.0 disruptive technologies such as Smart Automation and Artificial Intelligence that will significantly reduce the differential cost of labor between onshore and offshore manufacturers.

The business world has “ran the numbers” that shows no real labor advantage in going offshore when traded with the added cost of long supply chains that are far more wasteful and unsustainable. Also, being closer to the consumer to offer far less delivery times with far less inventory is a far better business model. This coupled with the political direction already mentioned is why 85% of large corporations are undertaking a reshoring strategy that is redirecting future recapitalization and investment strategies. Reshoring back to North America is doubling each year.

The reshoring of industrial and business capability also makes sense to avoid new geopolitical risks and protect national security. And after the COVID experience priority will be given to such products as pharmaceuticals and medical devices, as well as key modern society foundation technologies, such as electronic devices.

Trump will continue to use border trade tariffs as a negotiating tool to get the attention of other trading nations and ensure solid control of external trade.

Trade tariffs at a national border can be used to re-direct demand, capacity, employment, capital investment and business activity such that it is relocated within the national trade zone. Such trade tariffs will be used as a short-term strategic tool to reshore industries and rebalance trade. Some tariffs may become an ongoing control tool on certain targeted commodities to restrain ongoing imports.

This tariff activity will also generate significant revenue and may allow a reduction in internal taxation to neutralize the impact of any cost or price pressure on the citizen population. Also, the tariff revenue can be re-deployed to support the reshoring process through industrial subsidies for focused commodities or for industrial retraining and capital investment etc. Once reshoring has taken place then most of the cost of the tariff is eliminated, and only the full benefit of the increased value to the economy of reshoring is applicable. Also, if needed an export subsidy can be applied to boost export activity and add value to the national economy.

In the same timeframe, efficiencies will be found in the public sector and excess capacity redeployed and retrained to provide capacity for producing the reshored commodities and services.

In this manner, the tariffs will be used to maximize the value-adding revenue within the US economy to minimize and control imports and ensure that any remaining imports and exports can remain in better balance.

Tariffs can be a zero-sum game of expensive reciprocal tit for tat tariffs, but the USA unlike many other nations has the advantage of not being significantly export dependent and so can afford to close down imports by undertaking reshoring while still coping with export tariffs if they are applied.

Future North American Trade Options.

It is very unclear how the existing North American USMCA onshore free trade zone that includes the USA, Canada and Mexico will fit into this “USA only” trade strategy into the future.

The question for Trump is will the USA be better off within a US border tariffed trade bloc or will a larger trade bloc that includes the prior USMCA region make more sense if it can offer better economic and geographical autonomy including continental resources, border security and defence.

The following options are possible: -

Option 1. Keep USMCA and Re-negotiate as USMCA 2.0.

Trump is correct that there is a $260M annual trade imbalance that is collectively in Canada’s & Mexico’s favor.

He is also correct that it has been mostly a disadvantage to the USA s in sharing economic activity with these two other adjacent nations who are currently not pulling their weight in the maintenance of the continental borders and its defense.

He is also correct that he has the upper hand in any negotiation as the USA needs Canada and Mexico far less than Canada and Mexico needs the USA. The dependency on USMCA trade is far higher as a percentage of their total economies for both Canada (15.3%) and Mexico (20.6%) compared to the USA (3.3%) Also, exports to the USA is about 75% of Canada’s and Mexico’s total exports.

The main and only significant argument to avoid any radical change to the existing USMCA trading relationship is that all three economies signed a mutual long term free trade agreement and are now heavily intertwined and integrated after more than 40 years of some form of free trade between Canada and the USA and 30 years for Mexico and the USA. Therefore, any border tariffs will be highly disruptive to all three economies, and certainly a disaster for Canada and Mexico.

Mexico correctly argues that they have provided a low-cost-labor capacity for some manufactured goods without the cost of long global supply chains, and as the Mexican economy prospers it will provide a new consumer growth opportunity that is clearly an advantage to the USA economy.

The far more emotional argument is from Canada, who has been part of the post WW2 western alliance where the USA was always the over-benevolent hegemony. So, nations like Canada and most of western Europe have become over-dependent and accustomed to past USA benevolence and are deeply affronted that such benevolence is now being withdrawn. They have been pathological multilateralists and so firmly believe that such action is just not what a long-term friend does to another.

It is extremely doubtful based on his recent positioning that Trump will care or accept any such emotional arguments. But he will be highly cognizant of how any trade changes may disrupt the US economy.

If Trump decides to retain the spirit and scope of the old USMCA agreement, he will firmly demand that the following issues and opportunities be fully reviewed and settled in the negotiation process for “USMCA 2.0”.

Canada / USA Trade Issues & Opportunities?

He will demand that Canadian supply management restrictions on dairy and poultry that is still restricting the USA farmers full access to the Canadian market must be eliminated. It’s very unlikely that The USA will agree to the Continuance of the Canadian supply management process in the next USMCA negotiation.

Softwood lumber trade has been an ongoing battle between Canada and the USA, and this will certainly be on the agenda for both negotiating teams and its clear this must be resolved.

Digital media sharing agreements will need to be negotiated as Canada has too many restrictions on maintaining Canadian content and forces US media to reimburse Canadian sources.

Canadian Fossil fuel resources certainly offer the USA an advantage to buy from Canada onshore rather than go offshore, but Canada will want to re-negotiate a more competitive price and may ask for mutual investment to improve the pipeline infrastructure to support product delivery.

The Canadian mineral resources and mining sector is a strategic trade opportunity as the mining and processing of many minerals can be expanded to support the reshoring of the North American electronics and hi-tech industries. This can be a future strategic trade advantage for Canada to use in the negotiations, as it can offset the need for the USA to import such resources from less friendly actors over far longer supply chains.

The Canadian nuclear industrial capability is a future trade opportunity as it can greatly assist the USA in moving more of its electrical energy generation to nuclear power.

Canada has surplus electrical energy that can be traded in the short to medium term to support the reshoring journey until more localized energy capability is built up and comes online in the USA.

The Canadian agricultural sectors offer significant capacity that currently supports the USA food sectors, and which enjoys a free trade environment.

Canada has a large advantages of fresh water supplies that can significantly benefit the USA, and this will certainly be part of the negotiations.

Mexico / USA Issues & Opportunities?

Its clear that the USA will want Mexico to significantly change its non-USMCA trade practices such as its open trade relationship with China to avoid Mexico being a back door for Chinese products.

North American Continental support resolution.

It must now be clear to Canada and Mexico that the “free lunch” of the USMCA relationship is now over.

They must except that from the USA’s vantage point there has been a lot of “freeloading” and “bad neighboring” on the part of Canada and Mexico in the past, and this must be corrected if any free trade relationship is to work into the future.

This will demand mutual responsibility for security of the US/Mexico and the US/Canada borders in terms of drugs, Immigration, illegal human traffic and weapons etc. Also, a far higher level of partner contribution to North American Continental defence of east & west coastlines, and the north arctic, and the southern Mexico border with South America that allows a significant free flow of migrant traffic. Its clear that future responsibilities must be planned and budgeted with measurements and goals set to the satisfaction of all partners.

North American infrastructure projects will also need to be shared across the trade partners. This will include less focus on building international ports, unless they support value adding exports, and more about supporting the reshoring journey with internal infrastructure improvement of north-south ground and air transportation, and improvements in communication systems, and the capitalization of key industries etc.

Supply- Chain Rationalization & Efficiency.

In USMCA 2.0 its clear that origin content will be strictly managed and will encourage local onshore supply chains.

A proposed new requirement for all USMCA partners will be to ensure that trade regulations include measurements and penalties to reduce the complexity and waste in supply chains. This to not only drive down the USMCA dependency on foreign imports, but to keep all supply chains as short and localized as practical. Their length, excess transactions and multiple border crossings have grown over time. In some ways free trade, both onshore and offshore, has allowed the increase in supply chain complexity which has added costs to the consumer, as well as increased pollution, and the need for more national infrastructure such as border controls.

Expert Opinion.

Many experts believe that the USMCA should continue but also agree that Trumps concerns must be addressed through a negotiation process.

Option 2. Dissolve USMCA and return to strong US border tariffs.

Currently the US leadership feels ripped off by both Canada and Mexico as both Mexico and Canada have a total Trade with the USA at 2.3% of US GDP or nearly $ 600B. They have a positive trade advantage over the USA of about $250B or 1% of US GDP. The US argues that this is a trade imbalance of more than 40% of the value of the total USMCA trade activity with the USA.

The Canadians who have a positive trade balance of about $130B with the USA argue that almost all of their imbalance is crude oil products that the USA needs so it can blend it with its own oil extraction products. And it’s argued that the US gets the Canadian crude at a reduced below market price and also benefits from onshore pipeline supply rather than import from offshore, and then greatly benefits from the significant profits when the crude is refined in the USA.

The Mexican argument is that although they do not have balanced trade, they provide a huge low-cost labor benefit to the US consumers who otherwise would pay more for products. Also, they argue they are a growth market for North American products.

Even with these explanations the US leadership is considering moving from free trade to tariffs to reduce trade with Canada and Mexico to maximize the economic value of products back within the USA rather than sharing it with its neighbors.

Some industrial sectors of the US economy could benefit from more localized and consolidated supply chains and could utilize existing US supply chain capability or economically develop expansions.

Also due to the huge economic size differential of the three economies (Canada about 8% of the USA and Mexico about 6%) the USA will have a significant advantage in gaining back economic value due to economies of scale and purchasing power. And many industry experts believe that if undertaken in a coordinated manner and after a full capital cycle the USA market will not be overly disrupted, and in some cases does not need the non-USA capacity. And in some ways the free trade environment has created duplicity and long and complex supply chains that currently cross borders many times, and that a forced reset may drive an opportunity for more rationalization and integration and the reduction of supply chain costs.

In certain industry sectors Canada and Mexico can show long term value in maintaining the free trade relationship, but for many trade areas they only have a short-term advantage, as the USA could eventually develop local stateside alternatives.

It is not clear if Canada or Mexico will have enough national demand in some industrial sectors to justify the development of local “branch plants” to service their own local markets, or if they will just be forced to import finished products from the USA to serve their local demand.

Let’s look at some key industry sectors…

The Canadian and Mexican auto assembly and feeder plants are part of an over complex cross-border supply chain activity that just adds waste and cost. So, if US / Canada and US / Mexico border tariffs were applied almost all of the Canadian auto industry would migrate south over time, and some of the Mexican capacity may migrate north, and only the growth in the Mexican auto consumer market would mitigate this trend.

The US believes that the US softwood lumber industry could be easily expanded to avoid any real need for Canadian capacity that could then be tariffed and the Canadian capacity only accessed for peak demands.

Canada does have heavy crude oil products that the USA needs so it can blend it with its own oil extraction products, and this will continue.

Some industries such as furniture and aluminum refining may stay localized by leveraging local resources or speciality material supply chains or significant sunk capital or labor skills or are best manufactured and serviced close to the consumer.

The food industries where a trade-off does exist between local produce and the cost of transporting perishable goods may drive some localized supply chains closer to the consumers.

Most Hi-tech industries will probably not be a strategic trade advantage for either Canada or Mexico as they will need USA support and large amounts of capital. Also, for many reasons the US would rather have these activities on their side of the border. Any talent available would easily relocate to follow the jobs and opportunities.

The Outlook & Risks.

If the USMCA were dissolved, and border tariffs installed, and free trade ceased, massive trade isolation would take place across the North American Continent. This would encourage Canada and Mexico to globalize a larger part of their trade activities. And this will definitely take us all back to the pitfalls of duplicitous trade activities, long supply chains, added business inventory and costs, increased pollution, labor arbitrage and job loss, wealth transfer and lower prosperity.

Expert Opinion.

Besides some of the trade advantages with Canada and Mexico as listed above, many economists caution that the USMCA environment after many years of free trade is now heavily integrated, and any significant supply chain resets could lead to massive economic disruption. Some US states are significantly dependent on the Canada & Mexico trade activity. This is probably the best argument for keeping the USMCA and not pursuing this option.

Option 3. Make the USMCA a true “localized trade bloc”.

Many of us believe this option has a lot of merit and worth significant review, but it does imply that the participating nations may have to relinquish some perceived sovereignty.

This would mean that effectively all 3 nations would be far more aligned and integrated on trade, border control, defence, and even public and cultural laws, and in some manner would eventually operate as a “Continental- Super-Nation”.

The new “Continental- Super-Nation” would operate as a free-market trade zone internally, but as a localized and integrated trade bloc externally. All imports external to the three trade bloc partners would be heavily and universally tariffed to force reshoring of a significant amount of trade value back into the Super Nation trade bloc.

Currently foreign imports across the 3 USMCA trade bloc partners is about $2.8 Trillion and is almost 10% of combined USMCA GDP with a total negative trade gap of about 4% of GDP or about $1.2 trillion.

It is estimated that if the 3 partners of this Super Nation worked together the USMCA foreign imports of $2.8 Trillion could be reduced by 80% to $560B, through coordinated reshoring. Clearly some of these

foreign imports may be difficult to immediately reshore as they may contain materials that are probably not currently available within the USMCA, but with careful review and with substitutions or resource and capacity development most of this trade value could be eventually reshored across the 3 USMCA partners.

Even with this massive import reduction the USMCA foreign exports worth about $1.6 Trillion would only reduce by 20% to $1280B as they are energy resources, food materials and technology products difficult for the foreign nations to procure elsewhere, or if necessary, these exports could be protected with export subsidies.

This trade reset would improve the overall USMCA trade imbalance from a negative trade gap of $1.2 trillion to a positive trade gap of $720B which would be an increase in overall USMCA GDP by almost 7% and would put almost $2 Trillion back into the USMCA economies, and this would constitute a massive opportunity to increase economic value across all 3 partners.

It’s worth mentioning that this 7% ($2 Trillion) trade bloc advantage makes the current 1% Canada and Mexico trade deficit of $250 Billion that Trump is upset about look like small pocket change in comparison.

The USMCA trade bloc would not constrain the three trade partners from increasing exports to foreign markets provided it did not jeopardize any capacity and availability in local USMCA supply chains.

Some special trade rules may need to be applied to certain commodities from certain non-USMCA nations, but these situations would be pre-agreed between the USMCA partners.

However, this trade bloc approach would certainly require the discontinuance or significant changes to many duplicitous multilateral trade agreements that have encouraged unmanaged USMCA external trade and has been a strong contributor to reduced prosperity within the USMCA.

This USMCA trade bloc reshoring approach besides putting prosperity and growth opportunity back into the hands of its citizens, would also reduce the massive waste in the existing global supply chains and reduce supply chain inventories that have been a contributor to the difficulty in increasing interest rates to spur investment activity. It would also reduce the geo-political risk of exposing the 3 economies to unfriendly actors.

Best Trade Option for All

It’s clear that Option 3 that will construct a North American Super-Nation operating as a “Continental trade bloc” is the best option, and can offer far better continent-wide border security, defence and economic autonomy. Such a trade bloc would add far more value to national citizens by mining, making, and growing far more of what they consume with the much larger economic autonomy that will minimize imports and the need for exports to balance such imports.

As mentioned already, this new USMCA must operate far differently than before, with no duplicitous multilateral trading agreements outside the USMCA trade bloc. Trade and economic capacity must, as much as practical be contained within the trade bloc through border tariffs and other trade controls.

Although some raw materials may need to be imported where local materials can never be provided from within the trade bloc the USMCA must strive to develop capacity to convert the materials into products inside the trade bloc.

Although Trump has upset many by saying Canada should become the 51^st US state he is technically correct that to make this North American Super-Nation work all three trade partners will need to put some national sovereignty aside and undertake a shared responsibility for the maintenance, security and defence of the overall North American continent. And it will also take far more alignment of politics, finances, laws, social rules. Also, it will demand a far more common culture of mutual teamwork and respect.

This outlook may be a hard pill for some concerned about sovereignty to swallow, but for many of us we have always felt that we were North Americans first and US or Canadians or Mexican citizens a very close second. So, lets work hard to keep it that way!!

Political Readiness

The Canadians and Mexicans are on high alert to see how Trump’s on and off again threat of massive trade tariffs works out!

They are hoping it will become a new USMCA free trade bloc agreement with associated policy agreements with far reaching commitments and measurable goals so that it will be lasting and binding.

The Mexican government has a recently elected government and is ready, but the Canadians badly need a federal election as a new federal government is needed that has a clear and lasting mandate so that a deal can be made with President Trump.

The new Canadian government probably needs to be a new conservative government for many reasons…

Firstly, the electorate is looking for change, and the existing liberal party is far too tainted after 8 years of past failures.

Also, the existing liberal party has a significant mismatch of ideology with Trump and MAGA and is completely unsuited to have any productive relationship with the new US President.

In some ways the resent harangues with Trump have been amplified due to his clear dislike for the past Canadian federal leader.

Also, the new Canadian federal government must ensure that all provincial governments are committed to the strategy for a final trade deal, and a new conservative government has the best chance to pull that together.

Canada and Mexico need leadership that can transition away from the now dead global order that worshipped the multilateral global free-market system that was followed since the end of the Second World War. Also, any political leader that has become tainted with the past UN multilateral initiatives and the WEF / Davos anti-natural resources agenda will struggle to accept and affiliate with the latest U.S. policies.

Final Comments

We are witnessing political change in many western governments that are moving toward a nation-centric leadership. Trump’s re-election in the USA is a prime example of the change underway.

Currently, an increasing portion of citizens in most western nations are disgruntled with declining prosperity and free trade globalization that has killed local industries and productive jobs. They are reducing their commitment to climate change mitigation that is damaging the cost of living, and uncontrolled immigration that is overwhelming both social services and housing.

Leading economists are now suggesting a major reorientation from globalism, consumerism, and finance. toward an economic-policy framework that is rooted in localism, production and work.

Many now believe that the unrestrained globalization and the uncontrolled financialization practiced so far in western economies has been the wrong direction. It has weakened national sovereignty, security, and with long supply chains has increased the sensitivity to systemic swings in economic demand and financial stability. It has made economies and prosperity far less sustainable. It has also made some nations dependent for a range of essential products and services on global actors that may not always have their best interests in mind.

For these reasons sensible nations will organize into autonomous localized trade blocs and reshore products and services to gain back as much resource and energy independence as possible.

Its clear that long supply chains supporting a globalized economy will be much more difficult to sustain.

This will further encourage deglobalization or regionalization of supply chains.

It will demand the need to Take Back Manufacturing within these localized trade blocs to create far more balanced and stable national economies that are highly sustainable and secure.

Its now clear that the world is not ready for a new world order or being dependent on the concept of the global village, or any other form of multilateralism, internationalism, cosmopolitanism or globalism.

Its also clear that the USA is now always going to be aligned with a nation-centric agenda whatever the political stripes in power.

Many other western nations are still in a long and painful process of political and policy transition toward a nation-centric mindset.

The near-term political challenge for North Americans will be how their new national leaderships can convince each other to become firm partners, and work together as a “working government coalition” to negotiate, plan, and re-form into fully functional, economically self-sufficient and secure North American Super-Nation that will operate as a localized trade bloc that can learn how to generate strong prosperity for the mutual benefit of all its citizens.

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Nigel Southway is an independent business consultant and the author of Cycle Time Management: The Fast Track to Time-Based Productivity Improvement, a LEAN thinking textbook.

He consults and educates worldwide on Business Productivity Improvement, Advanced Manufacturing Engineering, and Global Sustainability.

He is a past chair of the Society of Manufacturing Engineers and the leading advocate for the Take Back Manufacturing Forum, and the North American Reshoring initiative in Canada.

His latest book Take Back Manufacturing addresses the content contained in this article.