Imagining a World Without NAFTA
WHY YOU SHOULD CARE
Because messing with Canadian and Mexican trade could undermine U.S. production.
By Gregory Daco
Within his first 100 days in office, President Trump has vowed to renegotiate the North American Free Trade Agreement. We don’t know what form it will take, but one thing is certain: Many of America’s key production zones, which rely heavily upon strong trade links with Canada and Mexico, are at risk.
Inspired by the European Economic Community — an agreement aimed at eliminating tariffs and promoting growth within Europe — the U.S. and Canada signed a free-trade agreement back in 1988 to form the foundation of NAFTA under the leadership of U.S. President George Herbert Walker Bush, Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas de Gortari. It was signed in 1992, ratified by all three countries a year later and went into effect on January 1, 1994.
NAFTA called for a reduction of tariffs, customs duties and other trade barriers between the three signatories with some barriers removed instantaneously and others phased out over 15 years. The agreement barred state, local and provincial governments from imposing tariffs on goods traded between the members. It also provided duty-free trade for a number of manufactured goods and commodities.
Two myths led to populist support for Trump’s anti-NAFTA stance, as well as to its (mis)understanding.
Despite its numerous benefits in reducing trade barriers and promoting trade flows and growth for the U.S., Mexico and Canada, NAFTA became Trump’s punching bag. He blamed it for many of America’s ills and said it was “the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.” Protectionist rhetoric soared, with the president threatening to impose tariffs of 35 percent on Mexico and 45 percent on China. And while this appeared unrealistic without congressional support, trade-law scholars insist that the U.S. commander-in-chief has unilateral power to impose tariffs on countries deemed to be using discriminatory trade practices. Also, Article 22 of NAFTA clearly states that “a party may withdraw from this agreement six months after it provides written notice of withdrawal to the other parties.”
So what’s at risk? Three main blocks of states rely upon exports to Canada and Mexico for a sizable share of their gross state products:
- Small border states, such as Vermont and North Dakota
- Emerging Southern production nodes, such as South Carolina and Alabama
- Traditional manufacturing hubs of the Midwest, such as Michigan and Ohio
Interestingly, two of the most notable states that swung for Trump, Michigan and Ohio, are among the top exporters to Canada and Mexico — with 8 percent of Michigan exports and 5 percent of Ohio’s being destined for these countries (mostly related to the automotive industry). The Canadian connection is also relevant to factories in Tennessee and South Carolina and for energy companies in North Dakota. Likewise, Mexican exports are extremely important for Texas and California, although they account for a smaller share of the Golden State’s overall economy.
Two myths led to populist support for Trump’s anti-NAFTA stance, as well as to its (mis)understanding. The first stems from the preconception that trade is good for America and, therefore, for all Americans. Indeed, while free trade boosts incomes and helps countries prosper, research has proven that it can hurt some workers — particularly those in manufacturing — far more and longer than economic theory asserts. This has meant that, over the past few years, most political observers failed to recognize the growing discontentment among traditional manufacturing states.
The second myth emanates from a popular belief that free trade is a job killer and that it is the main factor behind the decimation of our traditional manufacturing employment base. Technology and automation are the true culprits disconnecting output and employment — not globalization. Machine learning and robotics will only continue to grow, automating more jobs and making some occupations obsolete. Despite U.S. automotive output and total employment hitting record levels, for instance, machine assembly jobs fell by over 20 percent from 2005 to 2015. The concentration of these jobs relative to the national average is greatest in the Midwest and South — regions that were the base for Trump support. Solving the problem requires domestic policies addressing unemployment and training shortfalls, not increased protectionism.
While more protectionism may seem like the right medicine, it could prove poisonous by worsening the economic condition of the U.S. economy and eventually hurting most Americans. We should not be tempted by easy fallacies that lead us to the wrong policies.
- Gregory Daco, OZY AuthorContact Gregory Daco