Would Trump Dump NAFTA?

The Key Points of NAFTA Renegotiations

Donald Trump near Mexico
Donald Trump listens as Laredo City Manager Jesus Olivares, center, and Laredo mayor, Pete Saenz, right, talks to the media along the U.S. Mexico border during his trip to the border on July 23, 2015 in Laredo, Texas. Photo by Matthew Busch/Getty Images

On August 16, 2017, the Trump administration began renegotiating NAFTA with Canada and Mexico. The North American Free Trade Agreement is the world's largest free trade agreement. For more on the agreement, see NAFTA Fast Facts.

The three countries hope to finish by the end of 2017. Trump appointed U.S. Trade Representative Robert Lighthizer to appear for the United States. The talks follow through on Trump's executive order to renegotiate NAFTA signed on January 23, 2017.

 (Source: "Trump Orders Imminent to Renegotiate NAFTA, Back Out of TPP," CNN Politico, January 23, 2017.)

In his first 100 days, Trump threatened to withdraw from NAFTA if Canada and Mexico refused to renegotiate. They are willing because the agreement is outdated. For example, it doesn't address internet commerce. It also needs to include environmental and labor protections that are in side agreements. For more, see NAFTA Purpose and History.

What Changes Would Trump Make to NAFTA?

The Trump administration wants to lower the trade deficit between the United States and Mexico. In 2016, Americans bought $55.6 billion more imports from Mexico than vice versa. The trade deficit with Canada is smaller. (Source: "U.S. Begins NAFTA Negotiations With Harsh Words," The New York Times, August 16, 2017.)

To do this, the administration wants to eliminate unfair subsidies. It will ask for stronger protection for U.S. digital trade and intellectual properties.

 It also wants state-owned companies, such as Mexico's Pemex, to operate more like private corporations. In 2013, Mexican President Enrique Peña Nieto allowed foreign direct investment in Pemex. But Pemex is a source of national pride, and it's unlikely to be privatized. (Source: "USTR Releases NAFTA Negotiating Objectives," Office of the United States Trade Representative," July 2017.

"Mexican President Proposes Historic Changes to State-Owned Pemex Oil Monopoly," The Washington Post, August 12, 2013.)

The Trump administration wants to end the dispute resolution panel. The U.S. Commerce Department has accused western Canadian provinces of subsidizing their lumber exports. That allows them to dump low-cost lumber into the American market. It unfairly underprices U.S. companies. The resolution panel has ruled in favor of Canada. The Commerce Department has threatened to impose a 20 percent tariff on Canadian lumber imports.

Other measures include making it easier for U.S. telecom companies and banks to operate in the other NAFTA countries. Similarly, the administration wants its trade partners to open up more of their government contracts to U.S. companies. At the same time, it wants to use “Buy American” provisions to limit their firms from winning U.S. government contracts. (Source: "NAFTA, Trump and Canada," The Globe and Mail, August 16, 2017.)

A March 30, 2017, draft NAFTA proposal wanted to allow "snapback" tariffs if a domestic industry was damaged by imports. But some experts claim those provisions are already in NAFTA.  (Source: "Trump Administration Signals It Would Seek Mostly Modest Changes to NAFTA," The Wall Street Journal, March 30, 2017.)

In the past, Trump said he would like Mexico to end its value-added tax on U.S. companies. Trump claims that the VAT acts as a tax on U.S. exports to Mexico. A VAT tax is like a federal sales tax that's imposed on all companies in the supply chain. 

Mexico charges a 16 percent VAT tax on all business sales, whether it's to other firms or the consumer. When companies export the finished product to the United States, Mexico rebates the VAT tax. But U.S. companies that export to Mexico must pay the VAT tax. Trump says that encourages U.S. companies to build factories in Mexico to receive the rebate and avoid the tax. (Sources: "How Does a Value-Added Tax Work, Anyway?" The Atlantic, March 1, 2010. "Trump's Incredibly Misleading Claim on Mexico," CNN Money, September 28, 2016.)

Trump has asked Mexico to end the maquiladora program.

This program allows U.S. companies to set up low-cost factories across the border in Mexico to assemble finished products. They then export the goods back to the United States. As a result, maquiladoras became responsible for 65 percent of Mexico's exports and employ 30 percent of the workforce. That undercut American workers and sent jobs to Mexico. NAFTA expanded the maquiladora program by ending tariffs. (Source: "Lessons of NAFTA," Worldpress.org, April 20, 2001. "The Benefits of Setting Up a Maquiladora in Mexico," The Offshore Group.)

What Do Mexico and Canada Want?

Mexico has asked the United States to allow its trucks on U.S. roads. That was promised in the first NAFTA agreement but withdrawn by the U.S. Congress. Mexico is also looking for an anticorruption clause. (Source: "What Mexico and Canada Want From a NAFTA Renegotiation," MarketWatch, July 20, 2017.)

Mexico and Canada both want increased access for business travelers. They will ask for inclusion of gender rights in the agreement.  (Source: "This Is What the United States, Canada and Mexico Want from Renegotiating NAFTA," Quartz, August 16, 2017.)

Could Trump End NAFTA?

Trump could end NAFTA by submitting a notice under Article 2205 of the NAFTA agreement. He would have to do so 90 days before withdrawal.  He may not need congressional approval to do this. Some experts refer to Section 125 of the Trade Act of 1974. It states that the president has the power to unilaterally withdraw from all trade agreements. Others refer to NAFTA's Implementation Act. They argue that, since Congress approved NAFTA, only it has the authority to withdraw. It's uncharted legal territory.

Even if the United States did withdraw from NAFTA, the other two parties could retain the agreement between them. But it would reinstate tariffs on trade between the United States and Canada and the United States and Mexico. That would raise the costs of imports from Mexico. Before NAFTA, Mexican tariffs on U.S. imports were 250 percent higher than U.S. tariffs on Mexican imports. Trump also threatened to impose a 35 percent tariff on Mexican imports. By law, he can only raise tariffs by 15 percent for 150 days without congressional approval. (Sources: "How Easily Can Trump Withdraw From NAFTA?" The Atlantic, April 26, 2017. "Trump Says He Will Renegotiate or Withdraw From NAFTA," The Hill, June 26, 2016.)

Without NAFTA, Mexico and Canada would probably return to most-favored-nation trade status.  Canada and the United States would probably reinstate their bilateral trade agreement. Exports from those countries would be assessed standard tariffs. At that point, importers would probably sue the U.S. government for making their costs higher overnight. (Source: "Yes, President Trump Could Kill NAFTA--But It Wouldn't Be Pretty," CNN Money, July 16, 2016.)

How Would It Affect the Economy?

NAFTA quadrupled trade to $1.15 trillion, as of 2015. It increased U.S. growth by 0.5 percent each year. That created five million new U.S. jobs, including 800,000 manufacturing positions. Canada and Mexico invested $240.2 billion in the United States, while U.S. companies invested $452 billion in those countries.

The United States imports $294.7 billion from Mexico. That's almost as much as it imports from China. Any trade change would threaten the flow and price of these imports. They include oil, manufactured products, fruits, vegetables, coffee and cotton. For more, see U.S. Imports by Year by Country

In the short-run, tariffs would benefit U.S. oil companies by raising prices on imported Mexican oil. They would also benefit U.S. farmers. They might restore the 500,000 - 750,000 manufacturing jobs lost in California, New York, Michigan and Texas. For more, see NAFTA Pros and Cons.

On the other hand, tariffs would raise the price of imports for American consumers. That might increase inflation.

Exports to both Mexico and Canada would decrease. Mexico would revert to the high tariffs it had before NAFTA. Mexico is the top export destination for U.S.-grown beef, rice, soybean meal, corn sweeteners, apples and beans. It is the second-largest export destination for corn, soybeans and oils. Similarly, 80 percent of Mexico's exports go to the United States. U.S. tariffs on these exports would be very damaging to Mexico's economy. (Source: "Trump: NAFTA Trade Deal a Disaster," Associated Press, September 25, 2015.)

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