Politics / Trade

The Uncertain Future of NAFTA

Overview

On May 18th Congress was given official notice of the administrations’ intention to renegotiate the North American Free Trade Agreement (NAFTA). President Trump has repeatedly stated his discontent with NAFTA, often referring to the agreement as “the worst deal of all time”. In the notice sent to Congress, Trade Representative Robert Lightizer, stated that it was the administrations intent to modernize NAFTA. However, the President has stated that he would consider withdrawing from the agreement entirely. NAFTA’s uncertain future has caused concern for many U.S. businesses and industries that have witnessed the success of the agreement first hand. Contrary to popular rhetoric, NAFTA has actually been beneficial for job creation and the success of the agreement cannot be measured simply by looking at the trade deficit.

This however does not mean the agreement is perfect. Generally, there is a consensus that there are gaps that need to be filled and the agreement could be modernized. For example, the agreement does not contain provisions for many technology and e-commerce products, as those industries did not exist when the original agreement was signed. Many industry professionals and elected officials are calling for a ‘do no harm’ approach to negotiations, which urges the administration not to move backwards on any progress made by the deal.

The Effects of NAFTA

According to a report by the Council on Foreign Relations, U.S. Trade with Canada and Mexico has more than tripled since the implementation of NAFTA. According to a report by the Chamber of Commerce, trade has nearly quadrupled to $1.3 trillion between the U.S., Canada and Mexico since NAFTA was enacted. This growth in trade has been more rapid than U.S. trade with any other country in the world. This growth has been crucial to the success of many U.S. companies and industries.

Canada and Mexico are the United States’ second and third largest goods trading partners, respectively. The two countries account for approximately one-third of all U.S. exports. The Office of the United States Trade Representative (USTR) estimates that in 2016, U.S. goods and services trade with Canada reached $627.8 billion and $579.7 billion with Mexico.

Many critics of NAFTA point to the trade deficit as a failure of the agreement. They assume a trade deficit is negative and harms the country, but this approach is not accurate. In 2016 the United States actually had a trade surplus with Canada of $12.5 billion. However, there was a trade deficit with of $55.6 billion with Mexico in 2016. Despite this deficit, increased trade with Mexico has actually been beneficial for American companies. For example, while there is an overall trade deficit, the United States has a service trade surplus of $7.6 billion with Mexico. Furthermore, in 2016, Mexico was the United States’ second largest exports goods market and third largest agricultural export market. In 2016 U.S. exports services to Mexico were up roughly 199% from 1993 (the year before NAFTA went into effect). Additional USTR statistics can be found here.

NAFTA has not only increased the volume of trade between the nations, but it has also played a vital role in employment and job creation in the United States. According The Chamber of Commerce’s report, trade between the nations supports nearly 14 million U.S. jobs. Of those 14 million jobs, nearly 5 million jobs are supported by the increase in trade generated by NAFTA. This equates to at least tens of thousands of jobs in every state and in seventeen states over 100,000 jobs. Farmers and ranchers have particularly benefited, seeing a 350% increase in agricultural exports to Canada and Mexico since NAFTA was ratified.

 Conclusion and Recommendations

Entirely withdrawing from NAFTA could have the exact economic consequences the administration is trying to avoid. U.S. business could be hit with retaliatory tariffs that would no longer make American products appealing overseas. Withdrawing could also reduce export and shrink U.S. businesses market share in Canada and Mexico. While there is certainly room NAFTA to be modernized, there seems to be a general consensus that withdrawing from the deal could have extreme adverse economic consequences for U.S. businesses. It is in the best interest of the nation to modernize NAFTA, not to withdraw from it.

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