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Donald Trump vowed to renegotiate or withdraw the United States from the North American Free Trade Agreement. (Photo: Trump Campaign via Latin America Advisor)
Wednesday, January 11, 2017

NAFTA: The Trump Effect

Will Mexico and Canada be willing to reform NAFTA?

Inter-American Dialogue

During his campaign, U.S. President-elect Donald Trump vowed to renegotiate or withdraw the United States from the North American Free Trade Agreement, which he called “probably the worst trade deal ever agreed to, signed, in the history of the world.” However, in a Dec. 5 speech, Trump advisor Anthony Scaramucci said Trump simply wants to “right-size” [NAFTA] and “make it fairer.” Is Trump likely to seek a renegotiation of NAFTA, and would he succeed in doing so? Is the U.S. Congress likely to accede to such a renegotiation or withdrawal? What would a U.S. withdrawal from the accord mean to the economies of the United States, Mexico and Canada?

James R. Jones, member of the Advisor board, chairman of ManattJones Global Strategies and former U.S. ambassador to Mexico: Election campaign bombast has given way to a more balanced post-election assessment of NAFTA as full information from the U.S. business community on the benefits of the trade agreement have been disclosed to President-elect Trump and his top advisors. Additionally, most of the cabinet-level appointees in a Trump government know that scrapping NAFTA would be very harmful to the U.S. economy and would disrupt a very efficient and globally competitive supply chain integration for much of America’s manufacturing base. So I don’t expect the Trump administration will tear up NAFTA and start over. But I do expect some negotiations to improve NAFTA. Strengthening labor and environmental provisions and making them a part of the treaty is likely. Improving the process for adjudicating trade complaints is also likely. Interestingly, both U.S. and Mexican business leadership know and support efforts to improve NAFTA. By negotiating similar changes, Trump can both claim fulfillment of campaign promises to his electoral base and show organized labor that he is sympathetic to some of their complaints. Trump is a master salesman who has a totally Republican-controlled Congress. So whatever a President Trump proclaims as a successful negotiation will likely be approved by Congress. China, not Mexico, is the bigger target for U.S. policymakers trying to correct perceived trade unfairness. Perhaps from all of this will come the real story of how NAFTA has benefited the U.S. economy.

Rogelio Ramírez de la O, president of Ecanal in Mexico City: President Trump is likely to change NAFTA, either by renegotiation or by withdrawal. He knows that withdrawal would only put bilateral trade back on WTO rules, so there is no major loss to the United States. He also knows that he would gain additional flexibility to apply countervailing duties case-by-case as needed and justified and negotiate entirely new bilateral agreements with Mexico that address his main concern: the loss of U.S. jobs due entirely to the arbitrage of wages. With Mexican manufacturing wages one-sixth to one-seventh of U.S. wages, the same as before NAFTA, it is plain that Mexico’s wages and standard of living failed to converge to U.S. levels in the past 22 years. NAFTA was acceptable to the U.S. Congress and small businesses on the expectations that Mexican wages would rise and converge and that North America would record large welfare gains. This 22-year experience makes the U.S. Congress more receptive to a renegotiation or a withdrawal, especially when political change has such strong popular backing. Renegotiation of a few bilateral sectoral agreements is still feasible and much easier than a whole renegotiation of NAFTA, provided that Mexico assures its partner that it has more than low wages or lower-than-Chinese wages to make it attractive for U.S. manufacturing investment. A withdrawal of the United States from NAFTA would be a serious setback to the present Mexican economic policy, more than to Canada. This is because, in the case of Mexico, NAFTA has been a pillar on which other policies have been adopted and foreign investment expanded, rather than just a trade agreement.

G. Philip Hughes, senior director of the White House Writers Group: President-elect Trump has been relentlessly critical of NAFTA from the beginning of his candidacy. After almost a quarter century, it is perfectly plausible that the tripartite NAFTA agreement could use a review—updating and improvement. President Trump will certainly have the power and authority to propose—and, if necessary, insist on—re-negotiating NAFTA with Mexico and Canada. It is hard to see how or why Congress would try to stop him. But if they don’t already know, USTR-designate Richard Lighthizer, and Commerce Secretary-designate Wilbur Ross will soon discover that Mexico and Canada will have their own lists of grievances, frustrations, demands and ambitions for a re-opened NAFTA negotiation. The result will be a product of give-and-take horse-trading—just as NAFTA is. Only better, the administration will explain. It would have to be. Where can you go but up from what Mr. Trump calls ‘the worst trade deal … in the history of the world’? Re-negotiating NAFTA, in whole or part, is plausible and probably do-able. Abrogating NAFTA is not. While the ability to ‘walk away’ is a hallmark of ‘The Art of the Deal,’ the new Trump trade team must know that, over the last two decades, the production base of most of the U.S. economy’s real sector has become quite thoroughly integrated across the Canadian and Mexican borders. Disrupting that would play havoc with supply chains, prices and employment on a continental scale—probably not a sure-fire vote-getting strategy.

Carlo Dade, director of the Centre for Trade and Investment Policy at the Canada West Foundation and non-resident senior associate in the Americas Program at CSIS: Trump has been fixated on NAFTA as a problem in U.S.-Mexico relations, but not as a U.S.-Canada issue. So far, he is using the threat of renegotiation to extract concessions from Mexico but not, or not yet, from Canada. Most Americans, and certainly those voting for Trump, could not care less about NAFTA itself; they care about losing jobs to Mexico, and no one worries about losing jobs to Canada. In a least worst case scenario, if Trump can exact enough concessions from Mexico and replicate his success with keeping Carrier in the United States, then the need to renegotiate should be lessened if not obviated, all potentially without any significant impact on Canada. But interestingly, in terms of one country stealing jobs from its neighbor, Canada has much more about which to complain, with U.S. states aggressively courting (some would say bribing) Canadian companies, especially in sectors like food processing, to move south. This becomes even more of an issue when Canada imposes a price on carbon and the United States does not. If NAFTA is re-opened then reigning in, or at least mandating transparency in, U.S. states’ use of specific company incentives to get existing firms to move will be a major issue from Canada. But, the ‘threat’ to renegotiate NAFTA is less a threat to Canada than it is to Mexico. Should the United States withdraw from NAFTA, the Canada-U.S. Trade Agreement would come back into force while NAFTA would remain in effect between Canada and Mexico. Canada would have two separate treaties covering all of North America but the United States and Mexico would have just one treaty each covering only two-thirds of the continent. As with so many things, the largest repercussions for Canada would come as collateral damage from the United States shooting itself in the foot.


Republished with permission from the Inter-American Dialogue's daily Latin America Advisor




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