By Dr. Mike Walden
For the past two years, the US has been locked in international trade disputes – frequently called trade wars – with several countries. There’s now been a thaw in some of these disputes with the recent conclusion of new trade deals with Canada, Mexico and China. The question for North Carolina is, will these deals help our state economy?
Before I give my analysis and answer, let’s start with some background on why the trade disputes occurred in the first place. Since the end of World War II, trade between countries has increased. This commerce was prompted by numerous trade agreements which reduced barriers to international buying and selling. The philosophy behind the trade deals was that countries bound by trading would be less likely to engage in shooting wars.
In the last quarter century two trade deals were major game changers. In 1994, the North American Free Trade Agreement (NAFTA) moved Canada, Mexico and the US toward one North American economy. Then in 2001, the World Trade Organization – which included the US – admitted China as a member and sparked the unprecedented development of trade between the world’s two largest economies.
Trade between countries results in each nation specializing in economic activities it does best, most efficiently and at lowest cost. For the US, this has meant a loss of many manufacturing companies that could now take advantage of significantly lower labor costs in China and Mexico. At the same time, industries like information technology, research, finance and health care expanded in the US to utilize the country’s highly educated workforce.
We can clearly see the results of these shifts in North Carolina. Big urban areas with universities and a college educated workforce have prospered, while many rural and small town areas that previously were home to textile and furniture factories have fallen behind.
It is changes like these that prompted a re-examination of NAFTA as well as our trade with China. Although all trade negotiations are challenging, the “new NAFTA” – called the USMCA (US, Mexico, Canada Agreement) – has now been completed.
The trade talks with China have been more contentious. Partly this is because each country imposed tariffs (taxes) on products imported from the other country. It’s also because the US complaints with China were about more than trade; they were also about how China conducted its economic affairs. Specifically, the US complained the Chinese government heavily subsidized companies directly competing with US companies. Also, China has been accused of using various tactics and regulations to access proprietary information of US companies operating in China.
Since the creation of NAFTA, North Carolina exports to Canada and Mexico have soared to more than $12 billion. Estimates indicate almost 400,000 jobs are directly or indirectly supported by these sales. The new USMCA could expand this impact in several important ways. Dairy farmers will have greater access to the Canadian market, and the state’s hog, poultry and fabric producers should see their exports increase. Additionally, North Carolina’s important tech industry will benefit from some new legal protections.
The potential biggest impact could be on North Carolina’s auto industry. “Auto industry,” you say. “We don’t manufacture vehicles in North Carolina!” That’s correct, but we do have a large auto parts sector. The USMCA will now require a larger percentage of auto parts assembled into vehicles in North America to be made in North America. This should create more work and jobs for North Carolina’s auto parts factories.
And speaking of auto assembly plants, the USMCA should increase North Carolina’s odds of finally landing one. This is because the new trade treaty requires a doubling of the wage rate paid to a significant number of Mexican auto workers. This measure will reduce the advantage of locating an assembly plant in Mexico and make North Carolina look better for any new assembly plant desiring to locate in North America.
The US-China trade deal should also help North Carolina. Over the next two years China has promised to purchase $52 billion more in agricultural products from US farmers than occurred in 2017. This should be a big boost to our state’s hog and bean farmers. China has also agreed to buy $32 billion more in manufactured products from the US in the same two-year period. Several North Carolina industries, including industrial machinery, tech equipment and pharmaceuticals, should benefit. China will also take steps to guard the private intellectual property of US companies. However, nothing in the deal addresses China’s large business subsidies.
This all appears positive, but there are always issues. Some question the production and pay mandates in the USMCA, arguing they’re examples of “managed trade” and not “free trade.”
Regarding the China deal, skeptics point out all tariffs have not been removed, meaning many US companies will continue to pay more for imported Chinese inputs. They also remind us that China has previously made promises about trade that were not fulfilled. However, supporters of the deal argue this time is different, as the US will be able to impose new tariffs if China doesn’t fulfill its trade promises.
These trade agreements will not return the North Carolina economy to what it once was, and alone they won’t end the economic gaps existing between urban and rural regions of our state. Yet in the 21st century economy, agreement seems to be the deals will be a net plus. Still, it will take years for both you and me to completely decide on the full impacts of our new trade world.
Walden is a William Neal Reynolds Distinguished Professor in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.