Donald Trump has repeatedly threatened to rip up the North American Free Trade Agreement (NAFTA.) Talks to revamp the trade deal start again this week, and should reveal whether the US president has been bluffing, or is serious about ending the 24-year-old pact between US, Mexico, and Canada.
This is the most critical point in the negotiations, which started in August 2017. The three countries have made progress in the least controversial items on the agenda, such as digital trade and making trade smoother. Still ahead are the thorniest part of the talks: the US’s proposals to make trade less free.
Trump says NAFTA is unfair to Americans. He wants to make it more difficult for Canada and Mexico to export to the US, and easier for the US to export to those two countries. Canada and Mexico are pushing back, and so are groups of American companies and farmers. What Trump is proposing would not only hurt the other two NAFTA partners, but US businesses as well.
Meanwhile, time is running out. The original goal was to hammer out a deal before presidential elections in Mexico in July. NAFTA talks would likely have to be postponed if negotiations are not finished by then. A few months later, in November, US mid-term elections also threaten to disrupt the process. Whoever wins the vote in either of the two countries could also dramatically change the course of the talks–or force them to shut down altogether.
There’s a chance it won’t come to that—Trump might pull out of NAFTA before then. Here’s what at stake for the US as negotiators from the three countries sit down in Montreal.
First a little background. All three countries agree that the deal is due for an update. Much has changed since 1994, when NAFTA came into effect, including digital trade and the opening up of Mexico’s oil sector. (If you want to know more about the original deal, read this primer.)
Canada and Mexico want to keep its free-trade spirit intact, while streamlining the flow of goods and strengthening the agreement’s provisions on labor and the environment. The US, meanwhile, wants to restrict trade through a series of measures some are calling “poison pills,” given their potential to derail the whole deal. These measures include eliminating dispute-resolution mechanisms that currently curtail retaliatory measures the US can take against Mexico and Canada (like raising tariffs), and a “sunset clause” that would force the partners to renew the deal every five years.
The Trump administration also wants products traded duty-free between the three countries to be made with more parts and materials made in the US.
Canada and Mexico have said all of those measures are unacceptable.
Trump’s proposed measures are an attempt to return to a time when American companies made more products in the US, but they fail to take into account how technology and NAFTA–and globalization, more generally–have changed manufacturing.
Robots are now doing many tasks previously performed by workers in both the US and Mexico. Companies have spread their supply chains across the world to become more competitive. In fact, even the company where Trump announced his “Buy American, Hire American” policy, a keystone of his campaign to return manufacturing to the US, has production facilities abroad. And were Trump to succeed in bringing back companies that have left, it’s unlikely they would generate as many jobs, or as well-paying, as they did in the past.
NAFTA has transformed Mexico, the US, and Canada into a single manufacturing region, and cutting off suppliers through trade restrictions could make American producers less competitive. Many products stamped with “Made in the USA” also contain materials and components made in Canada and Mexico. One case study, of the auto industry, found that if the US withdraws from NAFTA, imported car parts would become more expensive, raising the costs of manufacturing in the US, and spurring cost-saving measures, such as laying off workers.
To make American companies more competitive, Trump would do better by promoting more integration through NAFTA, rather than less, some experts say. That would help the three partners produce more efficiently and cheaply, creating a better position for all to fend off goods from countries outside the region, such as China.
China itself offers lessons of how being open to imports can make a country a better exporter. Lifting import tariffs resulted in a bigger variety of inputs available to Chinese manufactures, which were able to lower prices, become more productive, and more likely to export.
Another example of how being open to outside opportunities comes via Monterrey, the Mexican city that has attracted air-conditioning company Carrier and other US firms south of the border. The US invaded Monterrey during the Mexican-American War in 1846 to 1848. Instead of turning inward out of fear for the budding super power next door, local entrepreneurs used their proximity to the US as a springboard for industrialization. When NAFTA was rolled out, Monterrey had more than century of international business experience under its belt—and was in a better position to profit from the trade deal than communities in southern Mexico and in the US’s rust belt.
There are also cases that show how closing off to the outside can kill an industry. The US lost TV manufacturing because it tried to build up local champions through protections against imports, instead of plugging in to the emerging flat-screen technology scene in Asia. Today, most producers are Asia-based, while barely any TVs are made in the US.
A look at the US’s borders shows the potential of international integration and cooperation. Local communities along several points of the US-Mexico border and the US-Canadian border have been working to link their economies so both sides can do better—with some success. There is also strong support for cross-border cooperation from many members of Trump’s own party, particularly in Texas, a state that has greatly benefitted from NAFTA.
Trump is right to want to help workers who have been hurt by trade–something previous administrations didn’t do much of–but he’s going to have to change his tack if he wants to be successful. The US also has much to lose by abandoning NAFTA.
As Canadian officials lobbying for NAFTA have been pointing out to state leaders in the US, local economies do billions of dollars in business by exporting to Canada—and Mexico. US farms’ commodity exports to Mexico grew by more than 50% since 2002. Without NAFTA, Mexico will no doubt look for other suppliers—in fact, it already started. Last year, officials from that country made a sourcing trip to South America.
The reprisals would go beyond trade. Without NAFTA, Mexico is less likely to cooperate on other issues with the US, such as immigration and drug trafficking. Part of the reason illegal immigration into the US is down is because Mexican officials have been intercepting Central American immigrants who cross through Mexico on their way north.
Trump also risks hurting his base with his approach to regional trade. Areas that went for Trump in the 2016 election tend to be more dependent on trade than those won by Hillary Clinton. If Trump makes it more difficult for local producers to import raw materials and ship finished products abroad, he may find even more companies laying off workers and leaving, in the very areas that voted for him.