[Nytimes] Will Trump Go After Nafta With Tweezers or a Hammer?
Published January 25, 2017
It was a deal that created a deeply intertwined economy stretching from the Arctic to Central America and a generation of mostly warm relations between the United States and its two neighbors.
It has also contributed to the loss of manufacturing jobs in the United States and added to deep-seated discontent in the communities that lost them. That, in turn, helped propel a sharp critic of the deal to the White House.
So with Donald J. Trump in charge, what happens now to the North American Free Trade Agreement? It’s one thing to assail it as the “worst trade deal ever” as the president did during the campaign. It’s quite another to come up with an arrangement that is more advantageous to American workers and businesses.
“Nafta is logically the first thing for us to deal with,” said Wilbur Ross, the president’s nominee to be commerce secretary, in his confirmation hearing. It will be, he said, a “very, very early topic in the administration.”
So what might that actually mean? What can the president actually do, what benefits might be attained for the United States and what could go wrong?
Trade experts say there really is room to make major change in the two-decade-old agreement. A renegotiation could well lead to a better deal for all three countries. But it will require the United States to make concessions that the Trump administration may be wary of offering.
If not approached carefully, revamping an agreement that has created the economic underpinning of major industries would risk American jobs as well as higher prices for consumers. And the closer the Trump administration gets to blowing up the deal, the larger those risks loom.
Before diving into what could go wrong — and right — as President Trump looks to rework Nafta, it’s worth starting with the basics.
What is Nafta?
On Oct. 7, 1992, President George H.W. Bush stood in San Antonio flanked by the president of Mexico and the prime minister of Canada. “This meeting marks a turning point in the history of our three countries,” he said. “We are creating the largest, richest and most productive market in the entire world.”
Mr. Bush’s successor, Bill Clinton, was the one to push the North American Free Trade Agreement through a divided Congress. By 1994, the three countries were entwined in a trade deal that, in its 22 chapters covering 309 pages, lashed their economies together.
It eliminated most tariffs on goods traded between the nations, and set in place processes to get rid of regulatory and other barriers. The idea was that over time a company in Ohio could do business with a firm in Ontario as easily as it did with one in Indiana.
What have been its results?
As the election showed, whether Nafta was a good thing for voters in the United States or a bad one continues to be argued. But there are some things most people who study these things can agree upon.
The North American economy really does work as an integrated whole. United States exports to Mexico, for example, are now 3.5 times their 1993 level when adjusted for inflation. They have risen more than twice as fast as the overall economy. Trade between the United States and Canada has been pretty well balanced over time, but the United States has had about a $60 billion per year trade deficit with Mexico, importing more than it exports.
In the auto industry, for example, supply chains crisscross North American borders, with work of different complexity done in different countries. Your Ford made in Michigan might contain a dashboard made in Juarez and a transmission made in Windsor, Ontario. This complex supply chain has helped make the U.S. auto industry competitive with manufacturers in Asia and Europe, which also contain both low-wage and higher-wage countries with different specialties.
The impact on jobs and incomes in the United States is less clear. Economists broadly supportive of free trade deals argue that Nafta essentially encouraged a shift of jobs in the United States toward higher-value, more productive work, raising wages and having negligible impact on the total number of jobs. Those more skeptical of the deal view it as having created low-wage competition across the border in Mexico that accelerated the loss of manufacturing jobs. (See a more detailed explanation of the competing views here and here.)
One way to reconcile those two views: Nafta may have increased overall G.D.P. and average incomes in the United States — but at the same time contributed to the decline in well-paying U.S. manufacturing jobs that tended to be concentrated in certain cities and among certain groups of people, mostly blue-collar men.
Can President Trump kill the deal?
In theory, yes. But it would be a mess, particularly if he tried to do it right off the bat.
Article 2205 of Nafta says that a country can withdraw from the agreement six months after giving notice. But if President Trump did that, it would unleash disarray in major industries; ruin the ability to have good-faith negotiations with Canada and Mexico; and most likely cause a legal showdown with Congress (which passed Nafta all those years ago and wouldn’t want it abrogated without a say).
That doesn’t sound like what the Trump administration has cooked up. It’s more likely to reopen the deal. “I’m optimistic that we can renegotiate the deal that’s both advantageous to us and advantageous to Mexico, that’s a win-win for both countries,” said Steve Mnuchin, the Treasury secretary nominee, in his confirmation hearing.
Will Canada and Mexico come to the table for a renegotiation?
Sure looks that way. The White House has announced plans to meet separately with the leaders of both countries, and all signals are that they’re up for new talks. In the case of Mexico, President Enrique Peña Nieto has said he wants talks to cover a wider gamut than trade alone — implicitly threatening to become less cooperative on fighting drug trafficking and other frontiers if the Trump administration is excessively punitive in trade talks. And, of course, Mr. Trump’s announcement today that he will build a wall on the border — and that Mexico will eventually pay for it — could cause Mexico to rethink its outlook on trade negotiations altogether.
So what is the United States going to ask for?
We don’t know for sure, but some hints have emerged.
One strong possibility would be to focus on “rules of origin” governing what counts as an automobile or other finished good produced within the free trade area. For example, a steering wheel might be assembled in Mexico but include parts made in China; the rules of origin state how many of those parts can come from China while still counting as a Mexican steering wheel and thus enjoy the benefits of the free trade zone.
If the required share of North American parts were increased — from its current 62.5 percent for many auto parts to 75 percent, for example — it would give an advantage to manufacturers in the United States and reduce competition with the low-wage countries of Asia.
Another example of a possible United States priority: asking Canada and Mexico to be more liberal in allowing goods to be shipped into their countries with no taxes and little paperwork. (To be precise, asking them to raise the value of what would count as a “de minimus” shipment exempt from the usual customs process). That would be good news for American companies looking to sell into those countries.
The United States has long complained that the tribunals that settle trade disputes among the three countries are stacked against U.S. interests, and it could seek changes.
Those sure seem like perfectly normal things for trade deals to focus on.
They are. But there was one more goal for the United States that Trump argued for during the campaign, and it would be a bigger source of friction if his negotiators chose to pursue it.
Mr. Trump characterized the value-added tax that both Mexico and Canada have as unfair to U.S. companies. The tax is 16 percent in Mexico; when a Mexican firm exports goods to the United States, it receives a rebate for the tax it paid, and when a U.S. firm exports to Mexico, a comparable adjustment is added.
Mr. Ross, the Commerce secretary nominee, and Peter Navarro, a Trump White House trade adviser, argued in a white paper during the campaign that this amounts to an unfair export subsidy that penalizes the United States.
Canada and Mexico aren’t likely to see it that way, and will resist if the United States seeks a change to the rules so that a VAT adjustment is no longer added to U.S. exports into their countries. In their view — and that of mainstream economists — their approach to taxing is the only way to avoid unfairly penalizing their domestic companies.
The VAT is similar to a sales tax, and to the Mexican government, the Trump position will sound like the equivalent of Massachusetts demanding that it be able to sell its goods in Connecticut without a sales tax slapped on them.
So if that issue ends up at the center of the negotiation, things could get rocky.
But a deal should get done, right?
Maybe. But keep in mind: This won’t be a one-way street. Both Canada and Mexico expect concessions from the United States in return for concessions they make. And some of the things that the Mexican government most covets will rankle many Trump supporters.
For example, Mexico wants better access to a program, widely enjoyed at the Canadian border, in which shippers that pass a security review are allowed to cross the border with a less intensive customs process (this is the international trade equivalent of the “T.S.A. PreCheck” security line at the airport).
Mexico also seeks more favorable treatment for Mexican citizens with advanced skills seeking visas to work temporarily in the United States.
Needless to say, making it easier for Mexican trucks and Mexican workers to get into the United States isn’t exactly what Trump campaigned on. But that’s the kind of concession that may be needed to get a trade deal.
Is there a chance Nafta completely blows up?
There is — though not necessarily in catastrophic fashion.
Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics, lays out a possibility in which the Trump administration does eventually withdraw from Nafta, but in a context in which it has worked out separate deals with Mexico and Canada that maintain most of the trade arrangements codified in Nafta.
President Trump and his advisers have often spoken of a preference for bilateral deals instead of big multicountry trade deals. It is potentially a pathway for Trump to be able to proclaim that he ended a trade deal he assailed on the campaign trail, without wrecking the economy.
Even that wouldn’t necessarily be painless, however.
“It would be like Humpty-Dumpty,” Mr. Hufbauer said. “There will be firms and communities in the U.S. that will be adversely affected, that will close down if you disrupt these supply chains. That won’t make for good newspaper coverage, and presumably the Trump team will want to avoid that.”
Just how urgent is renegotiating Nafta?
Campaign promises aside, even some people who have been opposed to Nafta and other trade deals don’t view this as a first-order priority. U.S. trade with Canada is reasonably well balanced, and the trade deficit with Mexico is smaller than that with some giant Asian economies.
Robert E. Scott, the director of trade and manufacturing policy at the liberal Economic Policy Institute, sees more to be gained by rethinking the trade relationship between the United States and China, Japan, South Korea and even Germany. “Those are accountable for 80 percent of trade-related job losses over the last 20 years,” he said. “To me, Nafta is not a top priority.”
“There are much bigger fish to fry,” he added.