Making The Case For A Renegotiated NAFTA Agreement

Trump Trade Doctrine Will Impact Industry in a Big Way…

President Donald J. Trump has wasted little time putting his policy measures into effect. True to his word, he is expediting campaign promises as quickly and effectively as possible. Foremost among Trump’s policy measures is the Trans-Pacific Partnership (TPP).

This trade agreement is a highly contentious deal between 12 countries in the Pacific, with the US later being invited to join. During the election campaign, the TPP came under fire from all sides. Now, just days into his presidency, Trump has already signed an executive order to remove the US from the TPP.

The U.S. Constitution does not make provision for the termination of treaties between countries, and a lengthy battle is likely to ensue to renegotiate the terms of trade. The bigger question and the one that is weighing heavily on the minds of everyday citizens is how these trade agreements will affect things like industry and income inequality.

There is the issue of the exodus of millions of US manufacturing jobs from the US to Mexico. Conservatives and many liberals believe the slowdown of US manufacturing enterprise would have occurred regardless. It may not have been Mexico that got the jobs, but it certainly would have been China. Despite the conjecture, the net effect has been a trade deficit with Mexico and massive job losses to Mexico.

Washington cannot ignore these issues any longer. And that’s precisely why Donald Trump campaigned hard to renegotiate or scrap NAFTA for the American worker. As for the Trans-Pacific Partnership (TPP), the outcome of that trade agreement is uncertain because it never had any time to influence the US economy. Nonetheless, NAFTA has been widely criticized as an ineffective agreement that has been harmful to the US worker and the manufacturing sector.

Can Trump Create the Perfect Symbiosis between Corporations, Individuals, and the Environment?

Unfortunately for the US worker, both the TPP and NAFTA are focused almost exclusively on the corporate sector. This is not something unique to these agreements – all trade agreements are structured around the companies involved in manufacturing, production and export of goods and services.

US politics has taken many agonizing twists and turns over the years, starting with neoliberal economic policies which supported a top-down strategy of growing the economy. In other words, economic growth was centered on the corporations and their best interests (and whoever was in favor with the ruling administration got preference).

Multiple presidents – Democrats and Republicans – supported these neoliberal economic policies, and democratic front-runner Hillary R. Clinton did too, until the ultra-left Bernie Sanders made his opposition to such policies known. The sad reality is that corporations tend to enrich themselves at the expense of the populace. Whether Trump can renegotiate trade to benefit the worker remains to be seen.

The multi-pronged approach that Trump will be embarking upon should consider the environment, the workers and the corporations. A symbiotic and synergistic approach needs to be fostered to fulfill his promise of a better America, economically, socially, and politically.

How Will a Restructuring of NAFTA Take Place?

NAFTA – the North American Free Trade Agreement – is a complex set of trade agreements between Mexico, the US and Canada. It is already 20 years in the making, after becoming effective on 1 January 1994. NAFTA has given rise to supply chains across the North American continent. They flow from the south in Mexico to the north in Canada. It is estimated that trade within this North American power bloc amounts to $1 trillion per annum, and accounts for 30% of global trade with the US. Therefore, the significance of the North American Free Trade Agreement cannot be underestimated.

There are many long-term fixed investments that US companies have made in both Canada and Mexico, and vice versa, that will be difficult to renegotiate or scrap entirely. During 2015 for example, Detroit is estimated to have exported $17 billion in goods to Mexico, and $15 billion to Canada.

The Detroit metropolitan area relies heavily on exports to Mexico and Canada. However, despite the fears, there is near universal agreement that US industry can benefit from a renegotiation of the terms of NAFTA. In fact, President Barack H. Obama in his first year of office was intent on renegotiating the environmental and labor components of NAFTA. Obama was also in favor of the TPP, which Trump declared null and void on Monday, 23 January 2017.

How Will Industry Be Affected by Tariffs on the Mexico/US Border?

If we examine the top 5 trading partners of the US between January and November 2016, the NAFTA agreement is pivotal to US GDP. The top trading partner remains China, followed by Canada, Mexico, Japan, and Germany. However, a proposed tariff of 35% being levied on US companies trying to sell their Mexico-produced goods to the US will be detrimental to free trade and the US worker. Naturally, such a move is in direct contravention of the terms agreed upon in NAFTA.

As such, president Trump will not be allowed to do that until a renegotiation of NAFTA has taken place. Secondly, the WTO (World Trade Organization) would expressly forbid such an action as it is in violation of the US’s membership with the WTO. Even within the GOP, high-powered individuals such as Paul Ryan – House Speaker – refuse to cede any ground on the issue of tariffs. The idea that Trump wants to harm trade has largely been dismissed as nothing more than an attempt to discourage US factories from relocating offshore.

The question as to how the US will renegotiate the terms of NAFTA depends on who gets appointed to the Trump cabinet. Various Senate confirmations are still outstanding. For much of Trump’s campaign, he promised sweeping change without specifics. The same holds true today.

In any event, major changes to NAFTA could be 1.5 years in the making. One such opportunity available to the US is a backdoor tax proposal known as a VAT tariff. Mexico’s VAT is now up at 16% in the time since NAFTA’s inception, and this discourages US exports across the border, but it encourages US manufacturing operations to relocate to Mexico. This perpetuates the trickle-down economics known as neoliberal economics, but does little to assist the US worker.

When NAFTA came into effect in 1994, US exports to Mexico were approximately $48 billion. Today, US exports to Mexico are approximately $220 billion. The major industries that will feel the effects of NAFTA changes are the automobile industry and the parts industry. China is always snapping at the heels of manufacturers and suppliers, by trying to gobble up all business activity by undercutting prices and offering economies of scale at huge discounts.

US/Mexico Surplus Swings from $1.7 billion in 1993 to $54 Billion Deficit by 2014

Canada and the United States cemented a deal in 1987 which formed the bedrock of the 1994 NAFTA agreement. Canada remains the biggest export market for the US. Fortunately, the US has a trade surplus with Canada, and according to the Canadian Foreign Minister, more goods and services finds their way from the United States to Canada than vice versa.

The total value of US/Mexico trade is around $520 billion per annum. It is this 1987 deal that is likely to form the bedrock of any future agreements between the US and Canada, and the US/Mexico. While NAFTA has been in effect, US trade growth with Mexico and Canada has tripled. But the overall impact of NAFTA has been lukewarm.

That US GDP has benefited by approximately 0.5% according to economist think tank is negligible compared to gains made by Mexico. For example, some $80 billion was added to the US economy. That amounts to approximately $2 billion per annum in net gains for the US since NAFTA’s inception. However, it is the wage stagnation brought about by NAFTA that has rattled the average US worker and driven manufacturing activity out of the US. Consider that in 1993, the US had a trade surplus of $1.7 billion with Mexico, but by 2014 that has now swung the other way to a $54 billion deficit.

Only Congress has the authority to repeal NAFTA, but it is the sum of the components of NAFTA that need to be worked on and that is going to take time.