Will NAFTA Unravel Under Trump?

Mexico, Canada endorse need to improve free trade deal without undoing progress of last 20 years

By: Eric Kulisch
Photo: Ronnie Chua/Shutterstock
   Officials and business groups in Mexico and Canada, nervous that Donald Trump could end the free trade era between their nations, are putting a positive face on the election results, saying it offers an opportunity to educate the new administration on the benefits of existing trade relations and address their own agendas for regulatory simplification and other matters.
   At the same time, they are maneuvering to preserve their interests in any new deals.
   During the presidential campaign, Trump criticized NAFTA as the worst trade deal ever, saying it was responsible for massive job losses to Mexico, despite the fact that U.S. exports to Mexico are up 468 percent from pre-NAFTA days. He promised to unwind the trade treaty unless better terms are negotiated, including the elimination of Mexico’s value-added tax, which he calls a “backdoor tariff,” and “sweatshops” that undercut U.S. workers. He also threatened double-digit tariffs to address the trade deficit with Mexico, targeted import tariffs of up to 35 percent on companies that move production south of the border in search of cheaper labor and other benefits, and a crackdown on illegal immigration.
   Since entering into force in 1994, U.S. manufacturing exports to NAFTA partners have increased 258 percent and the United States maintains a manufacturing trade surplus. American exports of computer and electronic products, furniture, paper and fabricated metals have all more than tripled since NAFTA was implemented. The largest factor affecting the trade balance with NAFTA countries is the importation of fossil fuels and their byproducts. In 2013, Mexico was the third-largest supplier of foreign crude oil to the United States, but it is also growing as a large export market for U.S. refined petroleum products and natural gas due to the domestic fracking revolution.
   Trump could undermine trade with Mexico and its economy, even without abrogating NAFTA, by increasing cargo inspections at the border, trying to block remittances from Mexicans working in the United States, or other measures not directly related to trade.
   Supporters of cross-border trade are hoping to avoid such a situation.

   The Mexico Viewpoint. Mexico’s government has said it is willing to discuss NAFTA with Trump and suggested that new chapters could be added to the pact to deal with new challenges, such as e-commerce. But Mexican officials say raising tariffs or imposing quotas on goods would cause severe economic pain, including more unemployment.
   The United States is Mexico’s largest trading partner, absorbing 80 percent of Mexico’s exports. Much of Mexico’s economy is geared toward manufacturing for the U.S. market, benefitting from low tariffs and fast transport for goods due to proximity. After Trump’s win, several investment banks and debt ratings firms lowered their Mexico growth estimates for 2017 to a range of 1.7 percent to 1.9 percent, from about 2.5 percent. Uncertainty over trade with the United States since the election has exacerbated the weakness of Mexico’s peso against the dollar.

More specifically, trade with Mexico supports jobs in two crucial ways: by allowing for the creation of a regional manufacturing platform in which cheaper Mexican inputs make American products more competitive in global markets and by saving American consumers money that is then spent on goods and services that indirectly help pay wages for other workers

   On the flip side, Mexico is the second largest goods market for the United States and the third-largest export partner when goods and services are combined, after Canada and China. The United States has a $60.7 billion trade deficit in goods with Mexico on bilateral trade of $533 billion, with merchandise exports totaling $236 billion in 2015, according to the Office of the U.S. Trade Representative.
   One out of every 29 workers in the United States, or 4.9 million people, has a job supported by bilateral trade with Mexico, according to a new paper on U.S.-Mexico economic ties from the Washington, D.C.-based Wilson Center. The research, conducted by The Trade Partnership under commission from Wilson’s Mexico Institute, stresses that 4.9 million is the net gain in jobs after accounting for jobs that have been wiped away by imports. More specifically, trade with Mexico supports jobs in two crucial ways: by allowing for the creation of a regional manufacturing platform in which cheaper Mexican inputs make American products more competitive in global markets and by saving American consumers money that is then spent on goods and services that indirectly help pay wages for other workers.
   And U.S. firms that invest in Mexico tend to increase domestic hiring for higher-skilled positions in research and development, engineering and management, the report said.
   “Once the Trump administration realizes the value of NAFTA to the United States, I don’t think it will be as easy to exit. Huge sectors of the U.S. economy, from agriculture to automotive, and (companies in) border states, depend hugely on this trade,” said Erik Markeset, director general of Tsol, a provider of supply chain consulting and technology services in Mexico.
   Putting an optimistic face on the situation, he added “if NAFTA survives, maybe they tweak a few issues and it could be better than ever, a bullet-proof trade deal, kind of the Nixon-goes-to-China effect.”
   The pessimistic view is that the United States exits the trade deal, industries in both countries are significantly impacted, and the governments try to renegotiate rules commodity by commodity, Markeset said.
   Either way, he predicted, Mexico will try to pursue a more diverse trade strategy so it isn’t as hyper-dependent on the United States.

   Canada’s Position on NAFTA. To the north, Canadian Prime Minister Justin Trudeau has also said he is willing to re-examine NAFTA now.
   “Canada is committed to working closely with the new administration and the U.S. Congress. We will continue to make the case that trade and investment is good for the U.S. economy too, including the over 9 million U.S. jobs that directly depend on trade with Canada,” Alex Lawrence, press secretary for the Ministry of International Trade, said via e-mail.
   The Trans-Pacific Partnership agreement, which Trump says he will quickly withdraw from before it gets ratified, includes Mexico and Canada, and essentially would have modernized NAFTA.
   The Canadian Manufacturers & Exporters (CM&E) urged Trudeau, in a Nov. 10 letter, to prioritize efforts to ensure access to the U.S. market, which represents more than three-quarters of Canada’s total trade. The association said it would work to inform the incoming Trump administration about the critical nature of the U.S.-Canada economic relationship.
   Canada is the top U.S. export market, at $280 billion, and also the top market for 35 U.S. states.
   Two-way trade between the United States and Canada is almost $600 billion, 70 percent of which is manufactured goods. Canada enjoys a slight trade surplus ($15.5 billion) because of its large energy exports. The connective tissue binding U.S. and Canadian industry initially formed in the 1960s with an agreement on auto trade, which increased efficiency and production of parts on both sides of the border. The auto agreement served as the foundation for a bilateral free trade agreement in 1987, which led to NAFTA seven years later.
   Canada’s trade flows and investment with Mexico are much smaller by comparison, but still very important. Mexico is the third largest export destination for Canadian goods, after the European Union.

Mexico will try to pursue a more diverse trade strategy so it isn’t as hyper-dependent on the United States

   The U.S. and Canadian economies are so integrated today that it would be counterproductive for the United States to ramp up regulations on Canadian imports, CM&E noted.
   “Unlike trade with other countries, we do not simply trade finished goods with each other. We build goods together. We sell those goods to each other. And we compete together against the rest of the world,” the letter said. “If creating more high-paying jobs in manufacturing is a top priority for the new U.S. administration, then integrated trade with the Canadian market is critical to that growth agenda. This two-way flow of goods, services and people similarly supports both Canada and the U.S.’s agenda for innovation and economic growth.”
   In an interview, Matthew Wilson, senior vice president for the CM&E, was sanguine about NAFTA remaining intact.
   Once Trump begins studying NAFTA details and discovers how much it benefits the United States “there won’t be as much pressure to make changes,” he predicted.
   President Barack Obama also campaigned in 2008 about the negative effects of trade and the need to renegotiate NAFTA and then became a strong proponents of trade agreements once in office. Trump said in a recent video statement that one of the executive actions he plans to take his first day in office is notification of intent to withdraw from TPP, but the video made no mention of NAFTA.
   “We’re not overly concerned that NAFTA is going to be torn up and it’s going to be null and void” from the start, Wilson said.
   Canadian manufacturers, he told the Adam Smith Project, welcome the opportunity to improve NAFTA. “It’s almost a 25-year-old agreement. Anything that’s 25 years old could use a bit of a spring cleaning.”
   Tiffany Melvin, president of the North American Strategy for Competitiveness, echoed that sentiment. NASCO is a grassroots membership organization comprised of governments, metropolitan planning organizations, economic development agencies, industries and academia that want to strengthen North American competitiveness by collaborating on supply chain, workforce and energy issues.
   “NAFTA has been a very successful trade agreement. But we feel there’s an opportunity to improve NAFTA,” especially because technology has had such a huge impact on supply chains since it was enacted, Melvin said. She emphasized that NASCO is not taking a position on renegotiating NAFTA’s terms.
   One area where NAFTA hasn’t lived up to its promise is in reducing the amount of administration, paperwork and logistics required to import and export between Mexico and the United States, Alan Russell, president of TECMA, a manufacturing support services provider with offices in Texas, California and Mexico.
   “It is still very intense administratively and requires a lot of expertise and professionals to make it happen,” he said.    Non-manufacturing issues that continue to create tension between the two neighbors involve subsidized softwood lumber and dairy imports from Canada, and U.S. rules for labeling beef born or raised in Canada.
   Manufacturers can relate to some of Trump’s rhetoric on fair trade because it’s frustrating when market access between countries is not reciprocal, Wilson added, pointing to differences in trade patterns with China as an example.
   “In Canada, we’re much smaller. We rely much more on trade. But we need to have grown-up conversations sometimes about trade and that there are different types of trade: there’s good trade and bad trade,” he said. “And the type of trade that Canada and the U.S. have is good trade. The bad trade is frankly one that’s one-sided, largely as the result of dumping products into a market and then restricting imports from those foreign markets.”