Renegotiating NAFTA: Where economics and President Trump meet

Asit K. Biswas and Cecilia Tortajada

POLICY FORUM | September 4, 2017

Although renegotiations have begun in earnest, the Trump Administration will find it exceedingly difficult to get what it wants out of NAFTA, for both economic and political reasons, Asit K Biswas and Cecilia Tortajada write.

During his campaign for The Presidency, Donald Trump repeatedly said The North American Free Trade Agreement (NAFTA) is the “worst trade deal ever made by this country,” and even the “worst trade deal in human history.” He claimed that the US lost 700,000 jobs to Mexico as the result of NAFTA.

The xenophobic rhetoric, “America first” philosophy and muddled economic thinking (including an obsession with bilateral trade deficits) have undermined what has been a successful, and largely mutually beneficial, regional trading block.

Trade between NAFTA countries increased by more than 300 per cent between 1993 and 2016. The United States exported $231 billion in goods to Mexico in 2016, a more than four-fold increase over 1993. Similarly, Mexico exported $294 billion of goods to the United States, a more than six-fold increase since NAFTA began. Both countries have benefited significantly from NAFTA, although to be fair Mexican exports have grown at a much faster rate.

Canada, another target for President Trump’s trade rhetoric, was the largest goods export market for the United States in 2016 — at $266 billion — accounting in 2015 for 18 per cent of all American goods exports. Moreover, if service exports are included along with goods, the United States actually had a trade surplus with Canada, valued at $12.5 billion in 2016.

The United States’ main irritant with Canada is not the trade imbalance, but rather barriers in dairy products and poultry, and a continuing dispute on imports of softwood lumber, even though overall trade in that material is small.

Trump is opposed to all bilateral trade deficits, claiming that they destroy jobs. The US trade deficit with Mexico has increased to about $60 billion, and he feels this has to be reduced.

The overall annual US trade deficit has steadily increased from $70 billion in 1993 to $505 billion in 2016. The United States has trade surpluses with Hong Kong, Netherlands, Belgium, Australia, Brazil and UK, while its largest deficits are with China (by far), Mexico, Japan and Germany. Even if the United States managed to reduce its trade deficit with Mexico, its impacts on overall trade balance will be limited.

Overall, the trade deficit of the three NAFTA countries is approximately 2.5 per cent of their respective GDPs. Not exorbitant but not negligible either.

The loss of some five million US manufacturing jobs since the early 1990s is mostly because of productivity increases and technological changes, rather than bilateral and multilateral trade agreements. American labour productivity has increased by nearly 50 per cent since the early 1990s, and during this period manufacturing output increased by $800 billion.

One study has estimated that NAFTA has contributed to a little over 100,000 net job losses in the United States — about 0.1 per cent of the labour force.

The first round of NAFTA renegotiations began on 16 August. The approaches of three countries were starkly different. In his opening statement, Trump’s trade envoy, Robert Lighthizer, combatively asserted “NAFTA has fundamentally failed many, many Americans and needs major improvement.” He argued the agreement must be revised extensively so that bilateral trade imbalances can be significantly reduced to protect American jobs.

Canada and Mexico struck different tones. Canadian Foreign Minister Chrystia Freeland observed that her country “does not view trade surpluses or deficits as a primary measure of whether a trading relationship works.” Canada pointed to the US trade surplus with Canada, also highlighting the “deep friendship our countries share.” Mexican Economy Minister Ildefonso Guajardo declared “for a deal to be successful, it has to work for all parties involved: otherwise, it is not a deal.”

In the final communique from Round One, the three countries committed to “an accelerated and comprehensive negotiation process that will upgrade our agreement and establish 21st century standards for the benefit of all our citizens.”

However, shortly after the first meeting was over, Trump told supporters in Phoenix: “Personally, I don’t think we can make a deal… I think we’ll end up probably terminating NAFTA at some point.” Whether it is bluster or his expectation, only time can tell.

The current plan is for the three countries to have seven to nine rounds of negotiations, intending to reach an agreement by early 2018. If not concluded by March, the countries may have to take a break as a result of the presidential election in Mexico in July 2018.

The Mexican election will be a critical element for NAFTA’s renegotiation, especially considering US negotiating demands. Among these are raising the current 63 per cent threshold in North American car parts and introducing a new section mandating “substantial” US content, abolishing the existing dispute resolution mechanism, and “buy American” procurement provisions which will make it easier to impose anti-dumping duties on imports.

With President Enrique Peña Nieto’s popularity in a free fall (ranging between 12 and 20 per cent), it is unlikely he will be willing to face his Parliament with a trade deal that is unpalatable to Mexico. In the latest gubernatorial election in Estado de Mexico, the main bastion of President Nieto’s party, PRI barely won a bruising electoral battle with the new, leftist National Re-generation Movement (MORENA).

The leader of MORENA, two-time presidential candidate Andres Manuel Lopez Obrador (popularly known as Amlo), is a left-wing anti-American nationalist. He is now leading in presidential polls. If MORENA and Amlo maintain their lead, the probability of President Nieto asking for parliamentary approval for a renegotiated NAFTA is almost zero, unless it is perceived to be as good to Mexico as the previous agreement.

If Amlo becomes the next Mexican President, the chances of renegotiated NAFTA being approved by Mexico during his six-year term are rather bleak.

At the northern end of NAFTA, Canadian Prime Minister Justin Trudeau has promised that any renegotiated agreement will need to be approved by all the provincial legislatures. This will be a complex and time-consuming process.

This leaves the United States. After the strong rhetoric against NAFTA and all other trade deals, Trump will find it difficult to get any renegotiation through the Congress, despite Republican majorities in both houses of Congress.

Looking at all this dispassionately, Trump seems to be ensuring that neither Canada nor Mexico can depend on America for their future prosperity.

Irrespective of what happens to NAFTA, the US President is forcing Mexico and Canada to view the United States as an unreliable partner. Both are now working actively to develop deeper trade relations with Latin America, Australia, Asia and Europe. This is unlikely to be good news for the United States in the long-term.

Mexico now imports annually $18 billion worth of US agricultural products. But with forthcoming Mexican trade agreements with Brazil, Argentina, Uruguay, Australia and some Asian countries, agricultural trade with the United States will likely steadily decline. Trade with other food-exporting countries will probably increase rapidly as Mexico deliberately diversifies its food imports by reducing, or even eliminating, tariffs.

Ironically, the net losers are likely to be the farmers from the agricultural belts of the United States, many of whom formed a core base of Donald Trump’s support. Having let the protectionist genie out of the bottle, Trump is going to find out that it will be difficult to put it back in.

Asit K. Biswas is the Distinguished Visiting Professor, Lee Kuan Yew School of Public Policy. National University of Singapore, Singapore. Cecilia Tortajada is a senior research fellow at the Institute of Water Policy, Lee Kuan Yew School of Public Policy, National University of Singapore.