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Antonio Garza, counsel in the Mexico City office of White and Case LLP,   served seven years as the U.S. Ambassador to Mexico. (Photo: J Jarman)
Antonio Garza: “Americans do not realize that our meat, vegetables, and flat screen TVs, to name a few products, come from Mexico or from joint U.S.-Mexico production.” (Photo: Sharp)
Monday, July 25, 2016
Perspectives

Garza: NAFTA Change Would Hurt US Prices


US consumer prices and energy sector would hurt from weakening NAFTA.   

 

BY LATINVEX STAFF

 

Antonio Garza served seven years as the U.S. Ambassador to Mexico (2002-09), and is acknowledged as one of the top experts on U.S.-Mexico relations. He previously held statewide elected office in the United States serving as chairman of the Texas Railroad Commission, the lead regulator for the Texas energy sector, and earlier in his career served as Texas’ 99th Secretary of State where he was tasked with serving as the state’s lead liaison on border and Mexico policy. The Ambassador began his public service along the U.S./Mexico border as Cameron County Judge. Garza is a lawyer and currently serves as counsel in the Mexico City office of White and Case LLP.

 

Latinvex: What would be the impact on the US economy of renegotiating NAFTA?

Garza: That depends entirely on what would be renegotiated and how. If the renegotiated changes made it more difficult to conduct trade or to invest across the region, then the impact on the U.S. economy would be swift and negative. 

There are well-documented increases in regional trade and investment across North America since NAFTA came into force, would be put in jeopardy. There are also many industries that have arranged their production processes across the three countries in order to take advantage of various competitive advantages or to be in proximity to final markets. If NAFTA's rules were changed, then these companies -- which employ tens if not hundreds of thousands of people -- would have a tough and very costly time reorganizing their operations to stay competitive against their global competitors. 

Many of these U.S. based jobs would likely disappear. Though how many is up for debate. What is far more certain is that the prices for consumer goods would rise -- disproportionately hurting those on the lower end of the income spectrum, since a larger percent of their salaries would now be spent every time that they went to buy groceries or a new household appliances or on a big investment such as a new car.

Latinvex: What would be the impact on the Mexican economy of renegotiating NAFTA?

Garza: Largely the same as what would happen to the United States, given the intertwined nature of both countries' economies. 

Mexico depends heavily on its exports to the United States, and if the renegotiated changes included returning to tariffs levied on each export or import, it would be like adding sand to the gears of our highly efficient North American production platform -- things would slow down, displacing countless workers and creating upwards pressure on currently flat northward immigration numbers.

One particular area, among many, where Mexico's economy could feel the pain of a renegotiated NAFTA could be in its manufacturing sector, which thrives off affordable U.S. natural gas. If the new deal put restrictions or raises the price of the U.S. natural gas that is fueling Mexican businesses and factories, then there could be a knock on effect across the whole economy.

NAFTA also created formal dispute settlement mechanisms and investment rules. If these were altered in the renegotiations, then there would be less certainty for investors, with those sentiments reflected in cross-border investment numbers.

Latinvex: What would be the impact of the US withdrawing from NAFTA?

Garza: Withdrawing completely would have huge impacts on the regional economy. 

Americans do not realize that our meat, vegetables, and flat screen TVs, to name a few products, come from Mexico or from joint U.S.-Mexico production. Plus, Americans have a false sense that if we withdraw from NAFTA, all of the products that Mexico grows or creates and that we import would simply be produced in the United States. This is simply wrong.

First, to stay globally competitive - manufacturing jobs would not all come back to the United States. Some would be uncompetitive if they tried to operate completely in the United States, and so companies might move elsewhere (such as Southeast Asia) in search of even lower production costs. This means losses of U.S. jobs that would counterbalance, at best, any jobs that might be gained from withdrawing from NAFTA.

Second, any tariffs on energy imports or exports would hurt our nascent regional energy market. We import petroleum from our neighbors and export natural gas to Mexico. A renegotiation could hurt our companies, our most reliable energy partners, and any chance for Mexico to switch toward cleaner energy sources.

 

And third, many of the tropical fruits such as limes or vegetables including avocados would just become more expensive, since it may not feasible for climatic reasons to grow them in such large quantities within the United States.

Finally, moving away from the economic integration aspects of withdrawing from NAFTA, the agreement has also tied our three North American countries together in ways that fostered deep political partnerships. By removing this formal agreement, we could open ourselves up to another era of lower trilateral trust, with affects across other areas that we care deeply about, particularly regional security.

Latinvex: What flexibility would a President Trump have in renegotiating or withdrawing from NAFTA, i.e. how much could he do and how much would he need congressional approval to do?

Garza: This is a complicated question and one that would involve our neighbors for any renegotiations and that would also involve questions of executive and congressional authority for a unilateral withdrawal.

For renegotiating any part of NAFTA, both Mexico and Canada would also have to be willing to come to the negotiating table. Then any agreed upon changes would have to be approved by each country's legal and political system. A tall order.

For withdrawals, sadly, it might be easier. NAFTA's text allows countries to unilaterally withdraw six months after notifying the other members. NAFTA was actually passed as a "congressional-executive agreement" and not as a treaty, and although it might be possible for the US. President to unilaterally withdraw from the agreement, it would likely face legal challenges.



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