Donald Trump has made perfectly clear that he doesn’t like the North American Free Trade Agreement, calling it “the single worst trade deal ever approved in this country.”
The new US president, who has said he wants to renegotiate the treaty to include new terms on immigration and border security (two topics that hardly figure within the trade deal now), has already lost one major opportunity to revise the deal. Mexican president Enrique Peña Nieto canceled his trip to Washington after being baited by Trump on Twitter and getting cornered at home as the new White House dialed back up the rhetoric on building a border wall, this time with an executive order to go along with it.
But both sides insist the dialogue between the two countries remains open, and Trump is still expected to hold direct talks on the deal with Canada’s Justin Trudeau.
Meanwhile, here’s the background on one of the US’s oldest—and largest—trade deals.
NAFTA is a trade agreement between the US, Mexico, and Canada that virtually eliminated all tariffs between the countries, as well as other trade barriers, such as setting higher regulatory standards for foreign goods than for those produced locally. It was first negotiated under Republican US president George H.W. Bush’s administration, and implemented by president Bill Clinton, a Democrat, in 1994.
Unlike other agreements hammered out around the same time—Europe’s Maastricht Treaty or South America’s Mercosur—NAFTA hardly addresses the movement of people or broader political cooperation. It mainly concerns itself with the free trade of goods and services.
NAFTA is the successor to a free-trade agreement the US already had with Canada, the Canada-United States Free Trade Agreement, which was enacted in 1989. Mexico later proposed to make a deal with the US as it sought to open its economy. In the US, the idea was seen as a way to help boost the economic development of Mexico and curb illegal immigration from there. Access to Mexico’s oil reserves were also an enticing incentive.
Canada joined the effort and the three countries started talks in 1991. They had reached an agreement by 1992, but its approval in the US Congress stalled because of deep opposition among US constituents.
The qualms with NAFTA back then resemble those from today. Union leaders said it didn’t do enough to protect US workers. Environmentalists said it didn’t do enough to protect the environment. To address those criticisms, the three countries added two side accords, one on each issue, and the treaty started operating in 1994.
Since the US and Canada already had a free trade deal, most of the changes under NAFTA were related to exchanges between those two countries and Mexico.
The day it went into effect, Mexican tariffs on American exports, which on average had been much higher than those applied by the US to Mexican goods, disappeared for about half of the products. Other tariffs were phased out in the following years. Today, there are virtually no tariffs on merchandise circulating between NAFTA members.
To prevent other countries from benefitting from the agreement, NAFTA established rules of origin that mandate that whatever is exported duty-free must have a certain degree of North American components or labor. It also set up a mechanism to resolve conflicts between the three countries.
Trump, who fashions himself as an expert negotiator, sees NAFTA as a raw deal. He’s repeatedly said that American workers are losing out as US companies move south of the border drawn by cheaper labor. At first, he said he would scrap the whole thing. Now he wants to renegotiate it.
As US president, he has broad authority to set trade policies. And NAFTA contains provisions under which the treaty can be amended if all members agree. But from the outset, it looks like it’s going to be a complicated negotiation.
A top Trump adviser who met with Canadian officials this week indicated that the focus will be Mexico, not Canada. And Mexico is unlikely to easily concede on what Trump wants to do. The bulk of his anti-NAFTA rhetoric suggests what he’s after is making Mexican labor more expensive, in order to make American workers more competitive. A border tax, which he suggested he might want to see tacked onto goods made by American companies that move jobs abroad, would achieve that goal.
Mexico has already said it does not favor that approach. The country’s economic minister said on Jan. 24 that Mexico would pull out of NAFTA if the changes don’t benefit it. Indeed, if Trump insists that Mexico pay for his proposed border wall or taxes remittances from Mexican immigrants in the US, Mexico would likely walk out of renegotiation talks.
Even if Mexico accepted the renegotiated terms, it would have the right under World Trade Organization rules to impose its own tariffs on American exports in response to any US policy that discriminates against Mexican products, said Sean Ehrlich, a Florida State University professor who studies trade policy. The US exported more than $235 billion in products to its southern neighbor in 2015, and was on track to reach a similar amount in 2016. It’s less than what Mexico exported to the US, but not insignificant.
Another, less confrontational way to level the playing field between US and Mexican workers is to raise labor and environmental standards in Mexico closer to US levels.
It’s unclear how Trump might seek to modify NAFTA to help block undocumented immigrants, one of his top priorities. Experts say there’s little precedent of using a free trade agreement to achieve a goal of that sort.
NAFTA does have some provisions to allow the movement of people between the three countries, but they refer to professionals and business executives, who can come to the US under a non-permanent visa. The number of Mexicans who come to the US under the auspices of NAFTA is relatively tiny. In 2015, roughly 21,000 Mexicans were issued NAFTA visas. The total number of non-immigrant visas the US issued that year topped 10 million.
It’s hard to imagine what Trump has in mind to reinforce US borders under NAFTA. The term “border security” appears a single time in the 300-page-plus treaty, in the context of allowing business people to move between the two countries to work. Whatever Trump is envisioning on this point is something citizens of all three countries are anxious to know.