UnPresidented: Trump’s threat of NAFTA withdrawal still looms

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“UnPresidented” is a new weekly column discussing the transition and first days of the Trump administration.

 

In Trumpian rhetoric, the acronym “NAFTA,” regarding the North American Free Trade Agreement, can be likened to the bane of American existence. Or, at the very least, in President Donald Trump’s own words last week, “very, very bad for our country.” Though it may seem logical to suggest that, in accordance with his past views on the subject, Trump would immediately try to leave NAFTA (an act that would almost certainly be the harbinger of widespread economic destruction), the past week has brought a whirlwind of waffling from Trump on the subject.

In what may be seen as an attempt to live up to Trump’s trade promises in the last week of his first 100 days in office, the Trump administration announced on April 24 that it would impose new tariffs on the Canadian lumber industry. Disputes over Canadian lumber are no new thing, but the move symbolized Trump’s desire to enact the “tough on trade” attitude he had professed since day one.

Just two day later, news began to circulate that the administration was drafting an executive order that would withdraw the U.S. from NAFTA, resulting in frantic phone calls from Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto.

Though Trump said on Thursday that the trade agreement wouldn’t be immediately scrapped, he tweeted that if a “fair deal” doesn’t result from renegotiations, “we will then terminate NAFTA.”  It may just seem like the typical political theater for Trump, but the mere possibility of the US leaving caused the Canadian dollar to fall and the peso to plummet. It also brought widespread political disavowal across the aisle, with prominent congressional Republicans including Sen. John McCain and Senate Finance Chairman Orrin Hatch speaking out against leaving NAFTA.

Withdrawing from the trade agreement, which was signed in 1992 and eliminated most trade barriers and tariffs between the U.S., Canada and Mexico, would not be a simple endeavour completed by the stroke of a pen. An executive order like the one rumored would only begin a 6-month waiting period before the US could actually withdraw. It would also cause widespread economic upheaval, as the three countries’ economies have become closely intertwined over the years.

If Trump were to increase trade barriers, the automotive industry would likely be the hardest hit, as close to 20 percent of the trade between the U.S. and its NAFTA partners is automotive-related. According to a study from  Smithsonian-run Woodrow Wilson Center for International Scholars, “the United States, Canada, and Mexico produce and assemble automotive parts and components, and these parts and components may cross the NAFTA countries’ borders as many as eight times before being installed in a final assembly plant in one of the three partner countries.” With the addition of trade barriers, the cost of tariffs is compounded as a result of the many border crossings, which in turn greatly increases the cost of production in North America.

To Trump’s Rust Belt supporters, a large part of the appeal of leaving NAFTA comes from the idea that if we halt some of the trade with Mexico, automotive and other manufacturing jobs will stay in the country. In reality, the opposite is true. A study by the University of Michigan found that “by producing cheaper automotive parts and components on the ‘near shore’ in Mexico rather than truly ‘off-shore,’ Mexican automotive plants helped sustain a competitive automotive industry across North America.” In other words, without NAFTA, North American automotive companies wouldn’t suddenly create manufacturing jobs in the U.S., but rather would move to low-wage countries in Asia, Eastern Europe or South America.

Some of Trump’s biggest complaints about NAFTA are the trade imbalances that have resulted, with a recent letter from his administration to Congress stating that “The persistent U.S. deficit in goods trade with Canada and Mexico demands that this administration take swift action.” But the trade deficits of $11 billion with Canada and $63 billion with Mexico pale in comparison to the $347 billion trade deficit with China. And China would only stand to gain in the event of a NAFTA withdrawal, as an influx of manufacturing jobs would move across the Pacific.

It is also important to note that trade deficits aren’t as a rule detrimental to the overall economic health of a country. U.S. economic policy, thankfully, is more advanced than the 18th century colonial brand of mercantilism that was obsessed with having a favorable trade balance.

This is not to say NAFTA isn’t without faults. It still retains the controversy that surrounded it at its signing, regarding the discrepancy in regulations between the U.S. and Mexico and it has become woefully out of date in that it does not discuss the Internet, for example. But any supposition that Mexico and Canada are unwilling to make the necessary changes would be misinformed. The Trudeau and Peña Nieto administrations have both repeatedly expressed their willingness to come to the negotiating table in recent months.

In addition, the Trans Pacific Partnership (which was scrapped by Trump) had a number of provisions that would alter NAFTA with the agreement of all three countries. Some of the changes included the right to unionize for workers, increased environmental regulations and rules for digital commerce. NAFTA isn’t set in stone, and there are some positive changes that can be made without completely destroying the North American economy. Withdrawing completely, or at least forcing provisions that would damage relations between the countries, however, would be a disaster for the U.S. economy.

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