Those of us who followed the presidential election campaign will recall that one of President Trump’s commitments, if elected, was to pull the United States out of the North American Free Trade Agreement (NAFTA). First proposed during the Reagan administration, NAFTA was signed into law by President Clinton in 1993. It is an agreement among Mexico, Canada, and the United States which removed trade barriers among the three countries. With a combined GDP of $20 trillion, NAFTA is the world’s largest free trade agreement; and today, trade among the countries exceeds $ 1 trillion. By all accounts, NAFTA has been very beneficial to all three countries, but President Trump called it the “worst deal ever”, citing the loss of manufacturing jobs in the U.S., resulting from the agreement.
Shortly after the election however, after calls from President Pena Nieto of Mexico and Canadian Prime Minister Justin Trudeau, Trump agreed to renegotiate rather than withdraw. Negotiations began last year; and so far there have been seven rounds of negotiations with no end in sight, even though an agreement was expected to be finalized early this year. Many feel that the president should have left well enough alone and that his assumptions about the agreement were either premature or incorrect. It is true that some U.S. firms have moved manufacturing to Mexico; and lately, as wage rates increase in Asia, and political and human rights issues continue to be problematic, more firms are considering returning closer to home. Mexico has emerged as the country of choice for many.
After the passage of NAFTA, the automobile manufacturers were early entries into the Mexican market. Mexico accounts for about 20% of North America’s auto production, up from 3% in the 1980’s, and is expected to reach 25% by 2020. Honda, Nissan, Audi, Ford, General Motors, and Chrysler all manufacture in Mexico, and the industry has set the pace for other industries through their labor education and quality initiatives. Obviously, the auto makers have profited from NAFTA because of the lower wage rates they have enjoyed, and would stand to lose if a tariff was slapped on each auto they sent to the U.S.
But did NAFTA cost us jobs? According to the Economic Policy Institute, about 800,000 jobs were lost to Mexico between 1997 and 2013; but it is not that simple. This is far less than the number of jobs that have been created by NAFTA. The U.S. Chamber of Commerce estimates that about 6 million jobs depend on trade with Mexico, and there have been studies that show that we have lost more jobs to automation than to Mexico. On that note, many feel Trump’s emphasis is misplaced. According to a recent report from Pricewaterhouse Coopers, 38% of U.S. jobs are at high risk of being replaced by automation over the next 15 years, far more concerning than Mexico.
Most informed experts believe that terminating NAFTA would be disastrous. In a recent presentation to a Canadian business audience, Tom Donahue CEO of the U.S. Chamber of Commerce said, “Withdrawing from NAFTA would be devastating for the workers, businesses, and economies of our countries”.
In any event, the negotiations have taken so long there is no way Congress can make any decision on recommendations before 2019. By then, we will have had mid-term elections, Mexico will be electing a new president, and negotiations could take a totally different direction or be abandoned altogether. In the meantime, the president continues to antagonize our other trading partners, especially Canada.
In my opinion, killing or weakening NAFTA would be a big mistake. It could cost us millions of jobs that depend on the trade with Mexico, and if Mexican costs rose because of it, companies would not just shut their doors and move back to the U.S. They probably would take a hard look at the next cheapest country. Somehow, antagonizing our next-door neighbors doesn’t seem like real good politics to me, especially when they bring so much to the table.