In the past two years, the Trump Administration has threatened or implemented new trade restrictions that have impacted every single region in the world. Most are still pending further negotiations. But with the successful renegotiation of both a NAFTA and the US-Korea Free Trade Agreement (KORUS), we now have two data points where the Trump Administration threatened to withdraw from existing FTAs, only to conclude on a renegotiated agreement where the core of the old agreement remained in-tact. Can we learn from the final outcomes reached in those agreements, to better understand what the Trump Administration is looking for in its upcoming talks with the European Union (EU) and Japan, scheduled to begin in November?

One of the key elements that has been a part of every trade agreement reached is limitations on import growth of industrial metals and autos. When the US implemented global steel and aluminum tariffs in March 2018, President Trump told impacted nations to negotiate exemptions with US Trade Representative (USTR) Robert Lighthizer. South Korea negotiated an exemption to the steel and aluminum tariffs, but only by agreeing to limit its semi-finished steel exports to the US at 70% of average 2015-2017 levels – something known as a “voluntary export restraint” (VER). Brazil agreed to implement the same VER for its steel industry. Reporting at the time, seemingly confirmed here by the EU trade negotiator, suggested that the US wanted the EU to agree to VERs as well. The EU refused – and in response the US imposed steel and aluminum tariffs on the EU, and the EU responded with retaliatory tariffs.

Trump doubled down and threatened to impose global tariffs on auto imports. This did not come out of the blue: some of the key changes to the renegotiated KORUS agreement extended protections for the US auto industry, as well as increased markets access for US auto exports. But over the summer there were serious concerns that the US and EU were about to escalate into a serious trade war. Tensions cooled following a meeting between Trump and EU Commission President Juncker on July 25. Both parties agreed to suspend further tariffs pending trade negotiations, which are slated to begin in November.

Nothing material has changed since then on the EU-US side. But the conclusion of the new NAFTA gives us further hints that the Trump Administration will seek trade protections, including VERs. In most important respects, the new NAFTA preserves the key elements of the old NAFTA that allows for integrated North American supply chains. The most important changes to the NAFTA agreement are on autos, which includes an increase in local-content requirements for autos, as well as minimum wage requirements for auto workers. The former measure incentives more North America based production in the auto industry, while the latter measures removes some of the benefits for firms to shift production to Mexico to take advantage of lower wages. If Canada or Mexico fails to meet these requirements, then their autos would default to the normal tariff rates that the US applies to other countries outside of the NAFTA region. Because the tariff rate applied to other countries is, in some cases, quite low, there has been speculation that automakers in Mexico or Canada might just pay normal tariff rates rather than trying to meet the new requirements for certain auto products.

But there is more to it than that. The US signed ‘side letters’ with both Canada and Mexico. These side letters state that if the US implements global auto tariffs, the US will exempt a certain level of Canadian and Mexican auto imports. In the case of Canada, the US states that Canada would be allowed to import 2,600,000 passenger vehicles, all light trucks, and up to $32.4bn in auto parts. For Mexico, the limits were 2,600,000 passenger vehicles and $108bn in auto parts. These side letters, along with the auto sections of the renegotiated KORUS, opens the door for the US to use auto tariffs on the EU and Japan as a negotiating tool in its upcoming talks with the EU and Japan. Even if the US implements auto tariffs, they will not disrupt US-Korea and US-Mexico-Canada auto supply chains in the short-term.

The USTR has been so consistent in its drive to protect US manufacturing activity in steel, aluminum, and autos, that it would be very surprising for these features to be excluded from upcoming negotiations with both the EU and Japan. The USTR has carrots to offer, in the form of the removal of steel and aluminum tariffs and a return to a more comfortable trade environment, as well as sticks in the form of the threat of global auto tariffs, that it will use during the negotiation process.

As we discuss in our Global Outlook for 2019, we think further rounds of trade protectionism will disrupt business plans in 2019. The Trump Administration has concluded two important negotiations, but more are on the calendar, and more are likely to begin. Multinationals should conduct scenario analysis and contingency planning to prepare for further trade disruptions, issues that we discuss extensively in the ‘Trade Wars’ section of our Events to Watch in 2019.