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Judy Ford Wason Center for Public Policy

Wason Center

October 6, 2018

With Agreement in Place, Trump Closes One Front of His Trade War Before the Midterms

International / Issue

President Trible addressing the press in the Oval Office

While many Americans may not hold particularly strong opinions regarding trade policy, it is a very significant issue when it comes to elections.  This is mostly due in part to the social impacts of trade policy.  For example, a typical auto manufacturer employee may be indifferent in their support for a free trade agreement; however, once this agreement results in their job being outsourced to the foreign sector, the employee may very likely become vehemently opposed.  These issues have only become significantly politically since the implementation of NAFTA in 1994, as the agreement brought trade to the forefront of political discussion.  Therefore, trade often comes into play as a major electoral issue by discussing the international trade deficit, or the ratio of imports to exports.  When there is a trade deficit, meaning imports are higher than exports, incumbent parties generally experience a lack of support compared to when exports are greater than imports.  As it would happen, the U.S. is currently facing a trade deficit, which could signal trouble for the Republicans in the upcoming elections.

In August, the U.S. faced an international trade deficit equal to $75.8 billion, an increase of $3.8 billion from the July data.  The dollar value of exports has decreased from the July values by $2.3 billion, while import dollar values have risen since July by a slightly smaller margin of $1.5 billion.  However, imports have experienced more long-term increases than have exports.  The percent change in exports from August 2017 to August 2018 is 7.7, while the same value for imports is 11.0.  Going off this data and the conventional wisdom outlined above, it is possible that the increasing rate of imports will give the Democrats an electoral advantage in the 2018 elections. Although the trade war continues to escalate with China, the recently-accepted trilateral trade agreement between the U.S., Mexico, and Canada dubbed the USMCA combined with the $12 billion bail-out the Trump Administration gave to U.S. framers impacted by reciprocated tariffs, this hot button issue may be less of factor in next month’s midterm elections than previously expected.

One of President Trump’s main goals in negotiating the United States-Mexico-Canada Agreement (USMCA, also called NAFTA 2018 due to their many similarities) was to reverse the outsourcing effects of NAFTA. On the surface, it would appear that USMCA will alleviate the job loss by incentivizing a number of American industries to increase their domestic production. Among these are car manufacturing, which will now have a tailored minimum wage and increased percentage requirements for North American-made components, and the dairy industry, which will likely see increased export rates due to the opening of Canada’s dairy market to North American imports.

However, experts are still uncertain that USMCA will be able to reverse the outsourcing which stemmed from NAFTA.  Under USMCA, auto manufacturing companies must pay their employees an increased wage rate and requires that 75 percent of the component parts used by companies be produced in the U.S., Canada, or Mexico.  However, experts have pointed out that because of these requirements, it may be cheaper for companies to shift production to areas outside North America despite having to incur the current tariff rate of 2.5 percent.  If this were to occur, employment would not only be shifted out of the United States but out of North America altogether, resulting in decreased continental GDP.  Of course, President Trump also has ways he can prevent this.  Amidst his  “trade war” with China, which has currently peaked with tariffs totaling $250 billion and on half of all goods entering the U.S. from China, President Trump has also considered increasing the tariff imposed on auto imports.  The president is reportedly considering a tariff as high as 25 percent, which would almost certainly deter auto manufacturing companies from moving production off the continent.

So how will this impact the midterm elections?  In short, it depends on whether Democrats can successfully exploit the issue. Democrats running in agricultural heavy states such as Missouri, North Dakota, Indiana, and Wisconsin are already leveraging this issue in their campaign messaging. A major component to keep in mind is that before being implemented, USMCA must be approved in Congress, and this vote will likely not happen until after the elections. Therefore, electoral behavior according to these trade issues depends entirely on voter speculation, or what political scientists call prospective voting. It may be that USMCA is adopted and accompanied by increased tariffs, in which case exports would likely increase.  This scenario lends support to the Republican Party due to increasing domestic jobs and GDP.  However, if USMCA is adopted but tariffs remain unchanged, jobs will likely leave the continent and decrease GDP, which in turn would lend support to the Democratic Party.  It is also possible that Congress chooses not to adopt USMCA and stick with NAFTA, a move which would certainly shift support away from the Republican Party.  According to the conventional wisdom outlined above, two of these three scenarios would most likely shift support away from the incumbent party in power, which in this case is the Republican Party.  Trade policy seems poised to serve as a major issue for Democrats to campaign upon in the midterm elections, despite being a late arrival.  The outcomes of the approval of USMCA and the question of auto tariffs may even sway voter decisions going into the 2020 presidential election cycle, and if Trump’s renegotiated trade deal fails to deliver on its promise of a manufacturing renaissance, Democrats are sure to make trade a major component of their efforts in the 2020 presidential election, particularly as they work to reclaim their so-called Blue Wall in the Midwest.

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