US Wants Mexico, Canada to Form Powerhouse to Keep Supply Regional

President Donald Trump’s top trade adviser is quietly working to forge an alliance with Mexico, even as U.S. plans to build a border wall and threats to withdraw from NAFTA continue to inflame tensions with its third-largest trading partner.

Peter Navarro, who as head of the White House National Trade Council will play a leading role in the effort to re-negotiate the North American Free Trade Agreement, said in an interview the U.S. wants Mexico and Canada to unite in a regional manufacturing “powerhouse” that will keep out parts from other countries.

The Trump administration is re-examining a critical component of the free trade pact: the rules of origin, which dictate what percentage of a product must be manufactured in North America, Navarro said.

“We have a tremendous opportunity, with Mexico in particular, to use higher rules of origin to develop a mutually beneficial regional powerhouse where workers and manufacturers on both sides of the border will benefit enormously,” said Navarro “It’s just as much in their interests as it is in our interests to increase the rules of origin.”

For example, under the current agreement, 62.5%of the total value of cars sold in North America must originate in the U.S., Canada or Mexico to avoid import tariffs. The U.S. wants to raise that threshold, making it harder for parts from other countries to enter the supply chain.

Big Boxes

Navarro’s comments hint at the strategy the U.S. may use to negotiate a successor to the 23-year-old trade deal. Commerce Secretary Wilbur Ross has said serious talks with Mexico and Canada should begin in the “latter part” of this year. First, the administration needs to consult Congress for 90 days, a process that Ross has said will start this month.

It’s too soon to say whether Navarro’s views will become policy and Trump’s trade team is still coming together. The nominee to be U.S. trade representative, Robert Lighthizer, said at his Senate confirmation hearing on Tuesday that there’s a general consensus that Nafta is outdated and he believes re-negotiating the agreement can generate benefits for the bloc.

Ross, also expected to play a leading role on trade, has only been in the job for two weeks. Gary Cohn, director of the White House’s National Economic Council, and Treasury Secretary Steven Mnuchin have shown little sign thus far that they want to shake up the global economic order the way Navarro has advocated in the past.

“One of the most important things we need to do as a country through the bilateral negotiation process is increase the rules of origin, which specify how much of a product has to be made in the U.S.A.,” Navarro said. “The problem we’ve identified is the existence of the big boxes with the multinational logos on them, and you wind up assembling products with a lot of foreign components,” he said, referring to assembly plants.

Nothing Left

“What this shows us is a softening of tone,” said Viraj Patel, a foreign-exchange strategist in London for ING Bank NV. “It’s basically a continuation of the status quo.”

However, the general discount on the peso and the Canadian dollar from uncertainty about NAFTA is unlikely to lift until more details emerge about how a renegotiated deal will look, he said.

The Trump administration also wants to tighten the complex set of rules under which goods can be deemed to originate from the continent, said Navarro, an economics professor at University of California, Irvine, who has argued that cutting America’s $500 billion trade deficit is key to boosting growth and restoring manufacturing jobs.

Without closing the gap, “foreigners will eventually own so much of America that there will be nothing left to trade,” he said in a speech this month. The U.S wants to “reclaim” the parts of the global supply chain it has lost to foreign competitors because of unfair trading practices.

He has been especially critical of China, calling it the “biggest trade cheater in the world” in a paper co-authored with Ross during the election campaign.

Economists including Olivier Blanchard, formerly at the IMF, have argued America has a trade deficit because it spends more than it saves, making it pointless to try to reduce the deficit with individual countries.

Own Interests

Trump’s threat to pull out of NAFTA and build a border wall to keep out illegal immigrants has stoked tensions with Mexico, which has said it won’t agree to a deal that isn’t in the country’s own interests. In an interview on March 14, Andres Manuel Lopez Obrador, the radical outsider who’s the early front runner in an election next year in Mexico, blasted Trump’s “campaign of hatred” against Mexican immigrants and said he can’t wait to renegotiate NAFTA himself.

Mexico’s foreign relations ministry and presidency didn’t immediately comment. However, one lawmaker reacted positively to Navarro’s comments.

“These are encouraging words,” Marcela Guerra, a senator from President Enrique Pena Nieto’s Institutional Revolutionary Party who heads the chamber’s committee on North American relations. “It is the right path toward effective competitiveness.”

The U.S. had a trade deficit of $96 billion with Mexico in 2015. But Mexico actually had a trade deficit with the world that year, including a $64 billion shortfall with China.

While Navarro invoked the notion of a North American free-trade zone, he almost suggested the Trump administration would like to see that vision take shape through bilateral trade deals with Canada and Mexico, rather than the current three-nation framework.

“The North American area can be a tremendous powerhouse in the global economy under the right set of bilateral trade agreements,” he said.

By Andrew Mayeda, Eric Martin and Nacha Cattan