What Happens If Trump Dumps NAFTA
The Key Points of NAFTA Renegotiations
On March 5, 2018, the seventh round of NAFTA renegotiations concluded. The representatives of the United States, Canada, and Mexico admit that progress has been slow. The North American Free Trade Agreement is the world's largest free trade agreement.
That same day, President Trump said he would exempt Canada and Mexico from steel tariffs if they agreed to a new NAFTA accord. On March 1, he had announced a 35 percent tariff on steel and a 10 percent tariff on aluminum.
But on May 31, 2018, Trump announced the tariff would be imposed on Canada, Mexico, and the EU. Negotiators are still trying to move forward despite increasingly angry rhetoric from their nations' leaders.
History of NAFTA Renegotiations
The NAFTA renegotiations began on August 16, 2017. The three countries had hoped to finish by the end of 2017. The new deadline could be July 2018. Mexico is holding a presidential election that month.
Congress needed a text of the new agreement by mid-June to approve it in 2018. Also, Trump's "fast track" negotiating authority could end. Some members of Congress have threatened to block automatic renewal.
President Trump appointed U.S. Trade Representative Robert Lighthizer to represent the United States. The talks follow through on Trump's executive order to renegotiate NAFTA signed on 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 They are willing because the agreement is outdated.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 incorporate the environmental and labor protections that are in side agreements. For more, see NAFTA Purpose and History.
Changes Trump Would Make to NAFTA
The Trump administration wants to lower the trade deficit between the United States and Mexico. In 2017, Americans bought $71 billion more imports from Mexico than vice versa. The trade deficit with Canada is smaller.
To do this, the administration wants to rewrite the rules on auto manufacturing and trade. Negotiators from each country have agreed to decrease the percentage of a vehicle sourced in Mexico. It also wants stronger protection for U.S. digital trade and intellectual properties.
The Trump administration wants to end the dispute resolution panel. These arbitration panels rule on whether a NAFTA country treated a partner's overseas investments unfairly. The panels make sure U.S. corporations maintain the rights protected by the U.S. Constitution.
But the Trump administration claims it erodes the sovereignty of U.S courts. For example, 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.
U.S. Commerce Secretary Wilbur Ross suggested a five-year sunset clause. That would force the signatories to recommit every five years. The business community immediately pushed back. It would not invest in the new agreement's rules if they could be revoked in five years.
Ross also wants to update the rule of origins. It says that 62 percent of the parts of a car's sold in North America must come from the continent. But that allows too many parts to come from Asia tax-free.
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.
The administration had also wanted to eliminate unfair subsidies. It also wanted 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 the company is a source of national pride, and it's unlikely to be completely privatized.
A March 30, 2017, a 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.
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.
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 its workforce. That undercut American workers and sent jobs to Mexico. NAFTA expanded the maquiladora program by ending tariffs.
What 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 anti-corruption clause.
Mexico is creating a back-up plan if Trump makes good on this threat to pull out of NAFTA. It turned toward the Pacific Alliance. In 2011, the alliance created a free trade zone between Mexico, Colombia, Chile, and Peru. In 2017, 94 percent of all goods traded in the zone were tariff-free.
Canada wants the United States to end tariffs on its lumber and dairy products. It also wants Boeing to drop its lawsuit against Bombardier. The U.S. Commerce Department added a 220 percent tariff on the imports of Bombardier CSeries jets. As a result, Airbus will fund Bombadier's manufacturing plant in Alabama to skirt the tariff. That worsens Boeing's competitive position against Airbus, its biggest competitor.
Mexico and Canada both want increased access for business travelers. They will ask for inclusion of gender rights in the agreement.
How Trump Could Easily 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 each other. 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.
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.
How It Would Affect the Economy
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. These are just a few of NAFTA's pros and cons.
On the other hand, tariffs would raise the price of imports for American consumers. Inflation would increase as a result.
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.
American farmers are concerned that Trump would jeopardize their livelihood. They don't want to lose the $17.9 billion in agricultural products they exported to Mexico in 2016. Their Mexican buyers are hesitating to sign long-term contracts. Instead, many are already sourcing commodities from Argentina and other Latin American countries.
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.
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. It could force more Mexicans to immigrate to the United States.
Mexico has improved its trade relationship with the European Union. On April 21, 2018, the EU upgraded its trade agreement with Mexico. Once signed, it will remove tariffs from almost all trade between the two areas.