Trump killing NAFTA could hit U.S. hard
• Donald Trump has pledged to renegotiate or terminate the North American free-trade agreement, saying that it’s been a disaster for the U.S.
And the billionaire frontrunner for the Republican nomination isn’ t the first presidential candidate to bash the deal: Since its inception (Ross Perot warned of a “giant sucking sound” pulling jobs to Mexico), NAFTA has been a popular punching bag for politicians. Despite the idea’s popularity, pulling out of NAFTA could have all sorts of unintended consequences for U.S. businesses and the economy. ❚America’s biggest export market would be jeopardized.
U.S. goods exports to Canada and Mexico have quadrupled since NAFTA took effect in 1994, rising to about US$550 billion last year. That’s more than sales to China, Japan, the U.K., Germany, South Korea, Brazil, India, Russia and Hong Kong combined.
While critics have decried NAFTA and other free-trade agreements for opening U.S. markets to foreign products, the deal actually lowered tariffs in Canada and Mexico even more than in the U.S. The American government applied an average tariff of just 4.3 per cent to imports from Mexico and 5.1 per cent to those from Canada before NAFTA, while Canada had a 9.7-per-cent tax on imports from the U.S. and Mexico’s tax was 12.4 per cent, according to a study last year led by Gary Hufbauer, an analyst at the Peterson Institute for International Economics.
A return to the tariffs preNAFTA would mean “our exporters have more to lose in the immediate shock” than Canada and Mexico,H ufbauer said in an interview. ❚Jobs already gone wouldn’t return.
As with any trade agree- ment, jobs were both created and destroyed after NAFTA took effect as the workforce in each nation was realigned based on comparative advantage. In their search for lower costs for production chains, U.S. companies have moved jobs abroad — some to countries that have free trade with the U.S. and others to nations that don’t.
“If we didn’t have NAFTA, would things like clothing and automobiles that are produced in Mexico be produced in the United States? No,” saidD avid Gantz, who teaches trade law at the University of Arizona. “They’d be produced in China or somewhere that the labour costs are a lot lower. One needs to look at what the alternatives would be.” ❚The American economy overall would lose.
Thanks to NAFTA, U.S. consumers have enjoyed the benefits of cheaper imports from goods manufactured in Mexico. Scrapping the trade agreement might force Americans to stomach higher costs, from flat-screen TVs to Nissans to guacamole: Mexico is the world’s top producer of avocados.
Hufbauer estimates that NAFTA trade growth makes America US$127 billion richer each year, not only because of the boost to American exporters but also because of these benefits to U.S. consumers. That’s about US$400 per person.
“It’s not always visible to people because much of the benefit is at the checkout counter,” Hufbauer said. ❚American drivers could pay more for gasoline.
Canada and Mexico accounted for about half of U.S. oil imports in 2014, more than all the nations in OPEC combined and 84 per cent of the oil the U.S. bought from outside the cartel.
While a supply glut has driven oil prices to near a sixyear low, there’s no guarantee things will stay that way. Ending NAFTA could make the U.S. more reliant on imports from Saudi Arabia, Venezuela and other OPEC members when global demand rebounds down the road.
NAFTA gives the U.S. preferential access to oil, limiting the scenarios in which Canada can restrict energy exports to the U.S. If the U.S. didn’t import oil from its NAFTA partners, it could do so at higher cost from other countries, some of which aren’t as friendly to the U.S. as Mexico or Canada.