The Uncertain Future of NAFTA: Economic Stability at a Standstill

Members of the North American Free Trade Agreement. || Sourcing Journal.

After 23 years of trilateral trade via the North American Free Trade Agreement (NAFTA), pressure invoked by US President Donald Trump’s “America First” perspective in renegotiations has shrouded its future in uncertainty. Months into his presidency, Trump was to sign an executive order on April 29, 2017, announcing his move to withdraw from the trade deal. If it were not for his conversations with Mexican President Enrique Pena Nieto, and Canadian Prime Minister Justin Trudeau, the US may very well have opted for a withdrawal by now. It was due to these significant meetings and pro-business lobbying that he decided to entertain the possibility of renegotiation. Though Trump has not yet issued an executive order, the explicit demands of his ‘America First’ reform have proven difficult to satisfy. With as much as four rounds of NAFTA talks completed, the trade deal’s future remains precarious and the issue will unlikely be resolved before March of next year.

The North American Free Trade Agreement (NAFTA) came into effect on January 1, 1994, eliminating trade barriers between Canada, Mexico, and the United States. The treaty stipulates that each NAFTA country forgo tariffs on imported goods “originating” in the other NAFTA countries. Rules of origin enable customs officials to decide which goods qualify for this preferential tariff treatment. Since its inception, NAFTA has ultimately resulted in job creation, better consumer prices, and increased trade and economic growth for all three countries. So far, the accord has brought with it a large amount of prosperity for all those involved, and yet it has become a perennial target for scrutiny over the years, mainly due to US accusations that former American production - and thus jobs - have shifted to Mexico. In addition, critics claim job loss and wage stagnation in the US is driven by low-wage competition; companies opt to move to Mexico for lower costs, therefore creating wider trade deficits. The gist is that America gives more than it gets. It is this very same thought process behind Trump’s protectionist “America First” attitude. This has brought attention to “Buy American” provisions which state that all goods for public use (articles, materials, or supplies) must be produced in the US and manufactured from US materials (United States Code). This creates a price preference that favors domestic products from American firms. Some of the demands from the July 17 list released by the US Trade Representative’s Office include: reducing the US trade deficit, either by increasing US exports or reducing Canadian/Mexican imports, opening more Canadian or Mexican government contracts to US companies, and using “Buy American” provisions to bar Canadian or Mexican firms seeking government contracts.

While the Trump administration’s basic demands were outlined in this list, their more contentious demands came at the fourth round of talks on October 17, 2017 in Arlington, Virginia. Key issues discussed included revision to the“rules of origin” for automobiles, and the addition of the “sunset clause”; a provision that allows the accord to be renewed every 5 years. The ambitious policy changes regarding the automobile industry would require that each car exported from Canada and Mexico contain at least 50% US content to qualify for zero tariffs. US Trade representative Robert Lighthizer claims the goal of this demand is to bring manufacturing jobs back into the US and reduce the trade deficit. While wider trade deficits certainly carry a negative connotation, economically they are not necessarily detrimental. As former US Trade Representative and World Bank president Robert Zoellick said in an interview, “Trade deficits are simply a matter of subtracting exports from imports. They are not inherently bad. A country’s trade balance moves toward surplus during recessions and toward deficit during periods of economic growth.” If the US truly wishes to eradicate this trade deficit, they put an already competitive - due to open trade - automobile industry at risk. The intricacies of changing the “rules of origin”, especially in this case, jeopardizes the future of the automobile industry far more than it guarantees economic growth. Additionally, this would raise opposition from both Canada and Mexico. Similarly, a “sunset clause” is widely opposed as it would defeat the purpose of the trade agreement entirely. Since the purpose of the deal was to cement certainty and predictability in the multinational landscape, a re-up every half-decade is blatantly counter-intuitive. Going into NAFTA talks, Lighthizer reiterated two objectives above all else: updating the 23-year old agreement to reflect the modern economy, and reducing the “huge” trade deficit that cost the US tens of thousands of manufacturing jobs. Though Lighthizer claims to have made some headway in achieving the first objective, the three parties seem so far apart in their positions that satisfying Trump’s intensive protectionist agenda seems near unattainable. Amidst difficulties in the renegotiations, both Canada and Mexico stand firm in holding the line against the American offensive. The implications of NAFTA’s termination vary among the three member countries; however, the resultant economic uncertainty does not bode well for any party.

Mexico's Secretary of Economy, Ildefonso Guajardo Villarreal, left, shakes hands with U.S. Trade Representative Robert Lighthizer. || Sean Kilpatrick, AP.

Mexico has been clear that it is fully willing to cooperate in updating the 23-year-old accord, yet remains adamant against the unfavorable terms currently being offered by the US. The Mexican foreign minister, Luis Videgaray, has warned that abrupt termination of NAFTA would hurt US-Mexican relations in more ways than one. Besides the obvious economic impact, completely terminating the trade deal may affect cooperation on cross-border issues such as drug trafficking and illegal immigration. As their Secretary of Economy, Ildefonso Guajardo Villarreal, put it, “None of us want to end this process empty-handed, and there is no reason for that”(Sourcing Journal).

From a Canadian perspective as well, continuation of the trade agreement is ultimately favored, considering the deep ties between both nations, between which up to two billion dollars worth of daily trade occurs. . Furthermore, nine million American jobs depend on trade with Canada, as it is the largest export market for the majority of US states. With this in mind, it is clear that maintaining the trade deal is the safest choice. Unfortunately, Trump’s unfaltering position remains as “having no deal is better than having a bad deal”. If it comes down to the brashness of Trump’s administration, NAFTA could very well end up being a bilateral deal without the US at all. The next scheduled round of negotiations will occur in Mexico on November 17, three weeks later than intended. Without the necessary adjustments to US demands, it becomes increasingly probable that this impasse will end in the deal’s dissolution, or at least a internationally concerning American departure.