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NAFTA Survived Donald Trump
Despite Trump's repeated threats to exit NAFTA, in the end the historic free trade agreement was saved and renamed.
BY LATINVEX STAFF
In the spring of 2017, President Donald Trump ordered an aide, Rob Porter, to draft a notification letter withdrawing from the North American Free Trade Agreement (NAFTA). But he and other advisers worried that it could trigger an economic and foreign relations crisis. So Porter consulted Gary Cohn, the director of the National Economic Council, who told him: “I can stop this. I’ll just take the paper off his desk.”
Thus Cohn saved NAFTA under Trump.
The story was reported in a book by Bob Woodward – the famous Watergate journalist who now is an associate editor at The Washington Post. In the end, Trump was able to negotiate an alternative agreement – the United States-Mexico-Canada Agreement (USMCA) – that would replace NAFTA. But the USMCA largely kept most of NAFTA in place to the widespread relief of US manufacturing firms and foreign investors in Mexico.
NAFTA was implemented in January 1994 and marked a historic change in Mexico’s traditional protectionist policies. Except for the energy sector, all sectors of the economy were opened to foreign investments at a rate never seen before.
“NAFTA has made both the U.S. and Mexico more competitive and more productive through the opening of our markets and the increase of our interdependence,” Carla Hills, the US Trade Representative who lead the U.S. negotiations for NAFTA, wrote in Latinvex in 2012.
Despite Trump’s repeated claims that NAFTA was “a failure” it was in fact very much a resounding success and became a role model for free trade agreements worldwide.
“We have NAFTA, which is a total and complete disaster,” Trump said on December 1, 2016 at the Indiana factory of Carrier, a company he bullied to change its Mexico plans. “It’s a total and complete disaster. It’s a one-lane highway into Mexico. Nothing coming our way, everything going their way.”
Nothing? One-way lane? In 2015, US exports of goods to Mexico reached $236.4 billion, a fivefold increase from $41.6 billion in 1993 (the last full year before NAFTA).
Everything? Mexican exports to the United States accounted for 55 percent of two-way trade in goods. That’s hardly everything. US imports from Mexico reached $294.7 billion in 2015, a seven-fold increase from $39.9 billion.
In 2019, the last full year of NAFTA, US exports to Mexico reached $256.4, while imports accounted for $358.1 billion, according to US Census Bureau data.
“As a result of the high percentage of U.S. content in the goods that Mexico exports and the fact that Mexico uses half of its export earnings to purchase American goods, Mexican exports both to us and to others creates a benefit for the United States that is quite unusual,” Hills pointed out in her Latinvex article.
According to the Department of Commerce, U.S. exports of goods and services to Mexico supported an estimated 1.1 million jobs in 2014.
NAFTA significantly increased trade and investment in the three countries of North America and strengthened supply chains allowing for more joint production, pointed out Robert Pastor, who was senior advisor for Latin America on the staff of the National Security Council (NSC) during the presidency of Jimmy Carter. Until his death in 2014, Pastor – who wrote the book The North American Idea: A Vision of a Continental Future – was a fervent advocate for an integrated North America.
Since NAFTA entered into force, Mexico’s trade with the rest of North America and the average annual flows of foreign direct investment (FDI) from North America to Mexico increased dramatically, according to Beatriz Leycegui, who was Mexico’s Undersecretary of Foreign Trade from 2006 to 2011 and who served as director of legal analysis at the Mexican office in charge of NAFTA negotiations.
“The increase on trade and investment flows has occurred because of the legal certainty given to the economic actors in the region and the tariff preferences acquired through NAFTA,” she told Latinvex ten years ago.
NAFTA also spurred a dramatic increase in US investments in Mexico, which went from $2.5 billion in 1993 to $6.5 billion 2019. The total US investment position in Mexico went from $15.2 billion in 1993 to $90 billion in 2019, according to the Bureau of Economic Analysis.
But Trump didn’t only threaten to end NAFTA without replacing it, he also repeatedly threatened to upend trade with Mexico – even after negotiating the USMCA.
On May 30, 2019 Trump sent shockwaves globally when he announced that he planned to impose 5 percent tariffs on all Mexican imports on June 10 that year unless that country stopped all illegal emigration to the United States. Failure to do so would result in a gradual increase of tariffs through October when they would hit 25 percent.
“How can you trust Trump to honor a deal?” Chris Krueger, Washington strategist at Cowen said in a note quoted by CNBC. “Mexico submitted USMCA this week for ratification…Trump’s signature trade achievement was moving downfield…and he just threatened Mexico … with unilateral tariffs on ALL Mexican goods exports to the U.S.”
Ten days before his shock announcement, Trump had finally lifted year-long tariffs on aluminum and steel imports from Mexico and Canada, which were seen as the key obstacle for USMCA ratification by legislatures in the United States, Mexico and Canada.
“We just did not see this coming,” Ann Wilson, senior vice president of government affairs for the Motor & Equipment Manufacturers Association, told NPR after the new tariffs were announced. “Manufacturers flourish in this country when they have certainty. Now we have a real question about whether that certainty even exists.”
Before assuming office, Trump was threatening to levy a 35 percent tax on imports from Mexico – a move that would have increased prices on everything from cars to TVs, experts warned. “To put a tax of 35 percent on our exports will be paid by (U.S.) consumers,” Mexican mogul Carlos Slim warned.
On November 29, 2016 Trump announced that air-conditioner company Carrier would keep 1,000 US jobs instead of moving them to Mexico, as it had originally planned. With Carrier’s parent company United Technologies depending on US defense contracts, Carrier felt pressured to make the deal. Carrier originally would have saved $65 million by moving the jobs to Mexico since Carrier workers in Indianapolis earn $30 per hour in salary and benefits, compared to $3 per hour in Mexico, according too Bloomberg.
“Donald Trump’s actions were a shakedown, plain and simple,” wrote John Tamny, the Political Economy editor at Forbes.
Keith Hennessey, director of the National Economic Council under President George W. Bush, called it crony capitalism. “When a politician rewards his business friends and punishes his business enemies it’s called crony capitalism,” he wrote on his personal blog.
Bloomberg – the leading US business news service – also attacked the decision. “Bullying companies into bad decisions is no way to make America great,” it wrote in an editorial.
Trump’s intervention is typical of what happens in countries that Americans call “banana” republics, a senior Mexican state official said, according to Reuters.
In the end, most of NAFTA remains in place with the new USMCA, which went into force on July 1, 2020.
The USMCA is neither ideal nor as good as NAFTA, but clearly better than no deal, which would have significantly damaged the North American economies — including the key automotive sector — after nearly 25 years of trade integration.
Unlike NAFTA, the USMCA is limited in time. After taking effect in 2020 it will be reviewed every six years and could expire in 2036 or extend to 2056, according to an overview in USA Today.
“It would seem that this entire impulse to redo NAFTA and create the USMCA missed a key factor which is “if it is working, don’t fix it”,” Juan Francisco Torres Landa, office managing partner for Mexico City at Hogan Lovells, told Latinvex.
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