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Insights into Editorial: Trump makes it official: He will renegotiate NAFTA
US President Donald Trump has pledged to begin renegotiating the North American Free Trade Agreement (NAFTA) in upcoming talks with the leaders of Mexico and Canada. Trump has called NAFTA the “worst trade deal in history,” and blames it for the loss of manufacturing jobs in America’s Rust Belt. He has pledged to negotiate “tough and fair” trade agreements with the goal of creating more U.S. jobs as a top goal.
What is NAFTA?
NAFTA is the initialism for the North American Free Trade Agreement, an agreement signed by Canada, Mexico, and the United States that reduced or eliminated trade barriers in North America. (Since the U.S. and Canada already had a free trade agreement (signed in 1988), NAFTA merely brought Mexico into the trade bloc.)
Negotiations for the trade agreement began in 1990 under the administration of George H.W. Bush and were finalized under Bill Clinton’s presidency in 1993. The agreement went into effect on January 1, 1994.
What was the purpose of NAFTA?
In 1993 the European Union (EU) created a “single market”—one territory without any internal borders or other regulatory obstacles to the free movement of goods and services. This allowed every country and business in the EU to have access to more than 500 million consumers.
- NAFTA, which was approved that same year, was designed to have a similar effect, providing a way to allow the exchange of goods and services to flow more freely across national borders without the artificial restrictions.
- NAFTA provided for progressive elimination of all tariffs on any goods qualifying as North American. The deal also sought to protect intellectual property, establish dispute-resolution mechanisms, and, through corollary agreements, implement labor and environmental safeguards.
Why is NAFTA controversial?
NAFTA was controversial when first proposed, mostly because it was the first [free trade agreement] involving two wealthy, developed countries and a developing country. Some people felt that allowing free trade with a developing country provides an incentive for U.S-based business to move their operations to that country.
Since its implementation NAFTA has remained a prime target of trade protectionists (those who advocate taking measures such as taxing imports to “protect” domestic industries from foreign competition).
What has been the effect of NAFTA on the economy?
The net overall effect of NAFTA on the U.S. economy, while positive, appears to have been relatively modest. NAFTA accounts for an annual increase in GDP of about 0.1 to 0.5%. The primary reason the effect is so negligible is that trade with Canada and Mexico accounts for a small percentage of U.S. GDP.
What has been the effects of NAFTA on jobs?
Because of the complexity and variables involved, evaluating the impact of trade can be difficult—especially when trying to account for alternative effects. For example, many economists agree that while some low-wage American jobs were moved to Mexico, they were leaving anyway and would have likely gone to China or another Asian country.
But opening trade with Mexico also created additional jobs—many that are higher paying than those lost—that would not have existed without NAFTA. However, contrary to the claims of protectionists like Donald Trump, the number of jobs lost is rather minimal and the overall effect of the agreement has been positive.
According to a study of NAFTA’s effects, about 15,000 jobs on net are lost each year due to the pact. However, for each of those jobs lost, the economy gains roughly $450,000 in the form of higher productivity and lower consumer prices because of NAFTA.
Why its difficult for US to come out of NAFTA?
For many companies, the US pulling out of Nafta would mean having to unwind long-term investments. It would also mean losing access to cheap labour in Mexico, which many executives see as vital to their ability to compete against China and other low-cost producers.
So what if Trump just pulls America out of NAFTA unilaterally?
NAFTA’s Article 2205 presumably allows the president to pull the U.S. out of the trade deal without any input from Congress. All he has to do is provide six-months written notice.
However, America hasn’t walked away from a commercial treaty since 1866. And it’s an open legal question whether the executive branch can really just unilaterally withdraw from a treaty. So the White House could get sued right out of the gate by any number of businesses who rely on trade across the North American continent.
Congress also passed a number of laws to put NAFTA’s terms into effect. Those would remain regardless of NAFTA’s fate, and would have to be scrapped by the normal legislative process.
But if Trump does unilaterally end U.S. involvement in NAFTA, Canada and Mexico would presumably revert to their pre-NAFTA trade status. For Mexico in particular that could mean new tariffs, which brings us back to Mexico’s threat to retaliate.
So no matter which route Trump picks, it will be a big mess that probably ends with higher barriers and less trade.
Renegotiating NAFTA would be a massively complex undertaking. Not only would Congress have to agree to the new terms, but so would the Canadian and Mexican governments. Getting the former to come to the bargaining table might not be too hard, though. However, given the context a careful reconsideration is required.