What if America pulls out from Nafta?
President Trump wants to withdraw from the agreement, and with negotiations on rocky ground, that risk could soon become a reality
ince North Atlantic Free Trade Agreement (Nafta) came into effect in 1994, United States’ trade with Mexico and Canada has more than tripled, growing more rapidly than US trade with the rest of the world. Mexico and Canada are now the second and thirdlargest exporters to the US, after China. And the two countries are the leading importers of US products.
Trump has criticised Nafta for creating an unfair playing field, allowing Mexico to steal jobs from the US and opening the border to cheap, tariff-free goods. He wants to bring factory jobs back home.
But pulling out of the pact could have unintended economic consequences. Over the past quarter century, Nafta has reshaped the US economy and its demise could raise costs for US companies and consumers.
The Nafta agreement allows any of the countries involved to withdraw six months after notifying the other parties. Congress could oppose a White House decision to withdraw, arguing that the Constitution gives Congress power to “regulate commerce with foreign nations”. Members of Congress could also threaten to stall Trump’s legislative efforts, like tax reform, in order to stay his hand.
But there is no language in Nafta’s authorising law passed by Congress that requires congressional assent before leaving the pact. So Trump could easily dissolve Nafta with the stroke of a pen.
Under Nafta, the three countries pay nothing on most goods that cross the border. After the US exits the pact, the tariffs, or taxes, that Canada and Mexico put on its goods would rise. For some goods, tariffs could go as high as 150 per cent. That would cause prices to spike and cut into company profits.
All three countries are members of the World Trade Organisation (WTO), so tariffs could revert to those levels. Currently, they are 0 per cent for most goods under Nafta.
Pushing prices up
After Nafta, the WTO rules would apply to trade between the US and Mexico. Tariffs on agricultural exports to Mexico are particularly costly, including a 15 per cent tariff on wheat, a 25 per cent on beef and a 75 per cent tariff on chicken and potatoes. But goods like soap, fireworks, handbags and many articles of clothing face tariffs of 15 to 20 per cent. Mexican goods would, in turn, face an average US tariff of 3.5 per cent.
Trade experts are debating whether Canada and the US would revert to a pre-existing free-trade agreement between the two countries that was superseded by Nafta. If not, US exporters would face an average WTO tariff in Canada of 4.2 per cent, again with much higher rates on some goods, including 27 per cent for beef and 18 per cent for most apparel.
Higher tariffs would push prices up on a range of goods. Many vehicles in the US are manufactured in Mexico, like the Ram Heavy Duty pickup truck and Ford Fusion, while Dodge Challengers and Chevrolet Equinoxes are assembled in Canada. Prices would also surge for Mexican fruit and vegetables that fill US grocery stores.
The White House argues that a better trade deal would support companies making goods in America, thus creating more American jobs. That would likely be true in some cases. The US market is a very large one, so some companies would probably relocate production to the US to avoid paying tariffs.
But other companies might decide its cheaper to relocate their manufacturing out of North America entirely. They could, for instance, produce goods entirely in China and then pay the US tariff instead. The US tariff on passenger cars is only 2.5 per cent, so if Nafta falls apart it may be more cost-effective for companies to make cars in Asia.
A contentious collapse
A withdrawal from Nafta could set the stage for a new trade pact with the three countries, or perhaps a bilateral trade deal with Mexico and an updated agreement with Canada. But following a contentious collapse of the agreement, Canada and Mexico may be in no mood to negotiate. That could put the US at a disadvantage. Mexico and Canada could remain members of Nafta and continue trading on its terms. It’s important to note that the European Union has signed free trade agreements with both Mexico and Canada that lowered tariffs on most products to zero, meaning that European companies may have an edge over American competitors in those markets.
In the aftermath of Nafta, the most likely scenario is that Canada and Mexico would push ahead with trade agreements with other countries. Both are still in discussions to pass the Trans-Pacific Partnership, a multicountry trade pact that Trump withdrew the US, from on his fourth day in office. That deal would give Canada and Mexico tariff-free access to several lucrative markets, including Japan. Ana Swanson and Kevin Granville are columnists for New York Times.