Alfonso Llanes, Master Degree in International Development
“Under NAFTA United States trade with Mexico and Canada has more than tripled, growing more rapidly than American trade with the rest of the world. Mexico and Canada are now the second and third largest exporters to the United States, after China. And the two countries are the leading importers of American products.”
Trump has criticized NAFTA and wants to renegotiate it while threatening to end the agreement if he doesn’t get what he wants. But pulling out of the accord could have unintended economic consequences. Over the past 25 years, NAFTA has remodeled the United States economy, and its demise would have high costs for American companies and consumers.
The NAFTA agreement allows any of the three 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 of future legislation. But there is no language in NAFTA’s authorizing law passed by Congress that requires Congressional approval before leaving the accord.
Under NAFTA, the three countries pay nothing on most goods that cross their borders. However, if the United States exits the pact, the tariffs, or taxes, that Canada and Mexico put on its goods would rise. Moreover, the three countries are members of the World Trade Organization (WTO), so tariffs could revert to those levels.
Tariffs on agricultural exports to Mexico are particularly costly, including a 15 percent tariff on wheat, a 25 percent on beef and a 75 percent tariff on chicken and potatoes. But goods like soap, fireworks, handbags and many articles of clothing face tariffs of 15 to 20 percent. Mexican goods would, in turn, face an average United States tariff of 3.5 percent.
Trade experts are debating whether Canada and the United States would revert to a pre-existing free-trade agreement between the two countries that was superseded by NAFTA. If not, United States exporters would face an average WTO tariff in Canada of 4.2 percent, again with much higher rates on some goods, including 27 percent for beef and 18 percent for most apparel.
But the vast majority of the economic damage would be to companies that have spent decades building up complex supply chains along North America’s borders to take advantage of differing costs and resources. American automakers rely heavily on parts imported from overseas but agriculture, energy, retail and other industries can also be affected. These trading relationships help keep the price of the final product competitive with other major global manufacturing centers in Asia and Europe.
The automotive sector in the three countries is tightly linked, exporting and importing billions of dollars of assembly parts. Last year alone the United States imported 1.6 million vehicles assembled in Mexico however, about 40 percent of the value of the components in those vehicles came from the United States.
American textile makers shipped more than $11 billion in goods to Canada and Mexico last year, according to the National Council of Textile Organizations. The tariffs that the three countries have under the WTO are high, around 18 to 20 percent.
NAFTA opened major markets to United States farmers like corn which is now sold in Mexico, a market that they had previously been excluded from. Mexican avocados, tomatoes and other fresh fruits and vegetables are now commonly found in United States groceries, especially during the winter growing season.
For medical devices and supplies, Mexico is a leading provider, and some major American manufacturers have opened factories in Mexico in recent years to expand this market.
At the end of the day, higher tariffs would push prices up on a range of goods. Prices would also surge on Mexican fruits and vegetables sold in United States 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. But companies might decide its cheaper to relocate their manufacturing out of North America entirely and then pay the United States tariff instead which is only 2.5 percent, so if NAFTA falls apart it may be more cost-effective for companies to make cars in Asia.
A withdrawal from NAFTA could set the stage for a new trade pact with the three countries, perhaps as Trump wishes bilateral trade deals with Mexico and an updated agreement with Canada where Trump can use economic bullying in order to get his way. But following a contentious collapse of the agreement, Canada and Mexico may not be in any mood to negotiate with the whims of Trump.
Mexico and Canada could remain members of NAFTA and continue trading on its terms backfiring on Trump’s efforts to muscle his way into a new agreement. In the meantime, the European Union has signed free trade agreements with both Mexico and Canada that could result in European companies having an edge over American competitors in those markets.
If the United States decides to pull out of NAFTA, the most likely scenario is that Canada and Mexico would move ahead with trade agreements with other countries as both are still in discussions to pass the Trans-Pacific Partnership (TPP). Trump withdrew the United States from (TPP) on his fourth day in office. That deal would give Canada and Mexico tariff-free access to several lucrative markets, including Japan.
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