The case for and against the ‘worst trade deal in history’
The US and Mexico have agreed a new partnership and now Canada is deciding whether to join too. Helen Chandlerwilde reports
When president Donald Trump and Mexican president Enrique Pena Nieto announced details of a Us-mexico trade deal at the start of the week, they gave Canada, the third party to the 24-year-old North American Free Trade Agreement (Nafta), until today to sign up to the new arrangement.
The Canadian premier Justin Trudeau reckoned the deadline could be met, with the proviso that no deal was better than a bad deal, and his foreign minister Chrystia Freeland has been in Washington holding talks.
But what is the North American Free Trade Agreement, which president Trump has called “the worst trade deal in the history of trade deals”, and has sought to rearrange since he came into office?
How Nafta began
Ronald Reagan got the ball rolling in his presidential campaign of 1980, when he argued the case for a North American trade deal. In a televised speech announcing his campaign bid, he argued that moving goods more efficiently across the continent would “improve the life of all its inhabitants”.
Canada (at the time led by Justin’s father Pierre Trudeau) and Mexico were sceptical at first, believing the US would dominate the deal.
A change of leadership in Canada let talks begin in the mid-eighties, leading to the signing of the unpronounceable Cusfta (Canadian-us Free Trade Agreement) in 1988. Cusfta removed or reduced tariffs on goods from a range of industries, as well as services. It also had a dispute resolution mechanism and rules on government procurement.
Mexico later joined trade talks, resulting in Nafta, which came into effect on Jan 1 1994. Its terms were implemented gradually from 1994 to 2008. According to the US Chamber of Commerce, American trade with Canada and Mexico has almost quadrupled since 1994, adding 800,000 jobs in the US economy.
The case for Nafta
Isolating the effect of Nafta on economies is difficult, and estimates vary. However, many economists believe that Nafta has been a positive thing for the US, Canada and Mexico. They argue that increased trade has lowered prices for consumers in all three countries and created jobs from increased trade.
One 2014 study found that 2m US jobs depend on trade with Mexico, and that for each job lost in the US due to Nafta, the American economy gains $450,000 (£345,000) from increased productivity and lower prices. The US Chamber of Commerce estimates that increased trade due to Nafta supports 5m jobs in the US.
The case against Nafta
Other economists have made the case that although there are net gains across the US from Nafta, some industries and regions have been negatively affected.
The Council on Foreign Relations estimated that a third of US jobs in car manufacturing have been lost since Nafta came into effect in 1994. At the same time Mexico increased its number of car workers from 120,000 to 550,000.
The relocation of these manufacturing jobs, many of which provided stable middle-class incomes for Americans without a college degree, has been much discussed and politicised. Bestselling books such as Hillbilly Eleg y by JD Vance have told how towns, communities and families can struggle when a major manufacturing employer moves. Trump has also complained about specific tariffs on US goods, which he considers to be too high. He has singled out US dairy exports to Canada and Mexican automobile exports to the US as particular issues.
Canada and Mexico are important markets for the US
The US Chamber of Commerce estimated that, in 2017, $3.5bn of trade with Canada and Mexico moved across American borders every day.
Canada and Mexico are America’s second and third largest trade partners in terms of overall flows after China. In total, US trade flows with China were $660bn in 2017, compared with $536bn with Canada and $520bn with Mexico. For comparison, China’s trade flows are just 23pc above Canada’s, despite having a population that is 3,800pc larger.
Canada and Mexico are also the top two importers of US goods and services. In 2017, Canada consumed $236bn of American exports, and Mexico consumed $206bn, compared to $155bn in China.
The new deal and deadline President Trump has described the new Us-mexico Trade Agreement as “a much more fair bill”. Although full details are yet to be announced, under the new deal, Mexican cars imported into the US would have to be at least 75pc made in North America, an increase from the current 62.5pc. Another clause stipulates that 40-45pc of the vehicle must be made by workers earning at least $16 per hour. This is to reduce the incentives for American automakers to move production to lower wage Mexico.
The deal also pledges to keep tariff-free trade in agriculture.
There is also a so-called “sunset clause”, meaning that the deal requires reauthorisation every six years, or it expires after 16 years.
The Us-mexico deal is not a fait accompli: a push to get it approved by Congress before the US midterm elections, which could upend the Republican majority, is one reason for today’s deadline. Another is to make sure that Pena Nieto signs it before he hands over to his successor.