Trade negotiations are underway in Washington, D.C. Sounds like a snooze, right? But the implications of the NAFTA talks are potentially huge.
As it becomes more likely the Trump administration will cause the U.S. to withdraw from or otherwise torpedo the decades-old deal, some fear it will create economic confusion or crisis. Others hope terminating the deal will bring back jobs lost to offshoring through the years. The stakes are high.
NAFTA, the North American Free Trade Agreement, was finalized in 1994 by three signatories — the U.S., Canada and Mexico. It was implemented step-by-step over more than a decade to dramatically lower import tariffs and other barriers to investment and trade.
Through NAFTA, the three countries’ economies have become deeply integrated. Trade has exploded — from roughly $290 billion in 1993 to more than $1.1 trillion in 2016, the Council on Foreign Relations notes. U.S. direct foreign investment in Mexico shot up in that same period — from $15 billion to more than $100 billion.
The U.S. does as much trade with Canada and Mexico as with China, Japan, South Korea, Brazil, Russia and India combined, according to the Brookings Institution, a Washington, D.C.-based think tank. Major changes to NAFTA or a U.S. exodus from the agreement will affect businesses and local economies throughout the U.S.
According to Brookings, U.S. trade with Canada and Mexico is fueled mainly by the export and manufacture of goods, such as cars and airplanes. The think tank explains that U.S. manufacturers rely on less expensive parts imported from Mexico and Canada to build and sell their products at a competitive price for the world marketplace.
At the same time, there is a growing export of U.S. services, Brookings reports. In 2016, services made up nearly 50 percent of exports from America’s 100 largest metropolitan areas, where major banks, consultancies and universities are located.
According to the Council on Foreign Relations report, most estimates conclude that NAFTA has had a modestly positive impact on the U.S. gross domestic product. By contrast, critics say the bill is responsible for job losses and wage stagnation. They cite negative effects such as a growing trade deficit and U.S. companies moving their production to Mexico to reduce costs.
Economists have various interpretations of the data. In 2013, Dean Baker, an economist and the co-director of the Center for Economic and Policy Research, argued that economic gains from NAFTA had not helped most U.S. workers. By contrast, other economists have argued that U.S. consumers benefit from the lower prices and often-improved quality of goods from imports.
Enter President Trump
President Donald Trump’s administration has characterized NAFTA as a disaster for many Americans.
According to Trump, the agreement favored Mexico at the expense of U.S. manufacturing jobs and production. Trump reopened negotiations to reform NAFTA in August. He was following some early opponents to the free-trade deal, including 1992 presidential candidate Ross Perot, who then predicted a large loss of U.S. jobs to Mexico.
Trump has suggested that the U.S. could abandon the three-nation deal and then negotiate separate trade deals with Canada and Mexico. He has at other times called for a renegotiation of the deal — making adjustments that would update the agreement and make it fairer.
Some NAFTA supporters agree that it’s time to update the agreement, which was last negotiated about 25 years ago. Canadian Prime Minister Justin Trudeau has said he will work toward achieving a revised agreement. Mexican Secretary of the Economy Ildefonso Guajardo Villarreal recently praised Trump for taking a balanced approach to negotiation.
But recently, the Trump administration has turned up the heat by calling for any new U.S. trade agreement with Canada and Mexico to be allowed to expire after five years, Bloomberg reports. Officials from Canada and Mexico have strongly objected to this type of sunset provision, saying it would create too much uncertainty for businesses.
The U.S. Chamber of Commerce has accused the Trump administration of trying to sabotage negotiations with “poison pill proposals” — demands that Mexico and Canada could not accept. These include demanding more favorable treatment for the U.S. in matters related to car production.
Another demonstration of opposition: More than 310 state and local chambers of commerce on Monday sent a letter to the Trump administration urging that the United States remain a part of NAFTA.
Who would be affected?
Several groups have a stake in what happens to NAFTA. They include:
- Consumers: Higher tariffs and stricter rules governing the origin of components would mean price increases for many goods — from shoes to cars.
- Farmers: American farmers likely would face steep tariffs — as high as 75 percent — on their exports of meat, poultry and other agricultural products to Mexico if the deal falls apart, the New York Times reports.
- Workers: NAFTA critics — including unions and some Democratic lawmakers — hope that withdrawing from NAFTA (or adopting more protectionist rules) would prompt American companies to locate more of their production in the U.S. and bring back lost manufacturing jobs. But with complex supply chains that span all three countries, it’s not a simple equation, as the Los Angeles Times details in this report on auto manufacturing.
Indeed, the global trade landscape has changed radically since NAFTA was signed — with the emergence of trading powers in Asia, South America and Europe.
In that broader context, NAFTA has placed the U.S., Canada and Mexico in a better position to compete with Asia and Europe, argues Duke University professor Gary Gereffi, in a blog for the Brookings Institution.
He concludes: “The U.S. should be figuring out ways to expand NAFTA, not a plan to end it.”
The current round of NAFTA talks is now slated to run through Tuesday, Oct. 17, after being extended by two days.
What effect do you think NAFTA has had on your local economy? Would you support or oppose a U.S. withdrawal from the agreement? Share with us in comments below or on our Facebook page.
Kari Huus contributed to this post.