President Donald Trump has frequently threatened to withdraw from the North American Free Trade Agreement (NAFTA), just like he has done — to deleterious effect — with the Trans-Pacific Partnership and the Paris Climate Accord. At an August 22 rally in Phoenix, Arizona, Trump again claimed that he would “end up probably terminating NAFTA,” even as the renegotiation process for the deal with Mexico and Canada is underway.
Withdrawal is not the only threat to the agreement; in July, the Office of the U.S. Trade Representative (USTR) released a list of objectives for the NAFTA talks that reflects the president’s usual fact-free approach. So here are five flawed ideas about NAFTA based on Trumpian “alternative facts,” and some real news showing how withdrawal or faulty renegotiation would cause serious harm to the U.S. economy and to relations with Mexico and Canada.
1. “Take a look at NAFTA, one of the worst deals ever made by any country having to do with economic development. It’s economic undevelopment as far as our country is concerned.” —Donald Trump, remarks at the Conservative Political Action Conference (CPAC), February 24, 2017.
“NAFTA … created problems for many American workers. Since the deal came into force … thousands of factories have closed, and millions of Americans have found themselves stranded….” —USTR, Summary of Objectives for the NAFTA Renegotiation, July 17, 2017.
Although Trump maligns NAFTA as “the single worst trade deal ever approved in this country,” the deal was a significant net positive for the United States. NAFTA lifted most tariffs on member states’ goods, which dramatically expanded regional commerce. Annual trade among the United States, Mexico, and Canada was valued at $290 billion in 1993, before NAFTA, and has since increased to more than $1.1 trillion. The Peterson Institute of International Economics estimates that the agreement generates $127 billion for the United States yearly. Without it, the United States would face average tariffs of 7.1 percent on exports to Mexico and 3.5 percent on imports from Mexico, based on World Trade Organization data. This would increase the costs of all kinds of products and harm American consumers.
Evidence also does not support the idea that NAFTA has reduced manufacturing employment. The United States gained over 300,000 manufacturing jobs from 1994 to 2000 — after NAFTA entered into force — and a report from the U.S. International Trade Commission (USITC) found “little to no change in U.S. aggregate employment” related to NAFTA. Another study by USITC economists estimated that, as a result of NAFTA, employment in sectors like sugar and apparel decreased, but employment in other sectors like steel and machinery increased to offset this, and real wages rose slightly. Furthermore, according to the U.S. Commerce Department, exports to Mexico and Canada support 2.7 million American jobs. A NAFTA withdrawal would put these positions at risk. Trump ignores the benefits of North American trade and inflates its costs, and exiting NAFTA would dramatically reduce the advantages that this trade provides.
2. “The U.S. recorded its slowest economic growth in five years (2016). GDP [is] up only 1.6%. Trade deficits hurt the economy very badly.” —Donald Trump, tweet, April 26, 2017.
“GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports). Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth.” —Assistant to the President Peter Navarro, “Why the White House Worries about Trade Deficits,” Wall Street Journal, March 5, 2017.
The president’s advisers assert that trade deficits damage the U.S. economy and that eliminating them by changing trade deals will increase growth. This defies basic economic theory. Contrary to Navarro’s assertions, imports do not decrease GDP; the reason one subtracts imports from GDP is to avoid counting foreign production, since imports increase consumption and investment.
Economists note that U.S. trade deficits arise when America spends more than it saves and receives foreign investment to make up the difference, along with other factors like the dollar’s strength. In practice, such deficits tend to be higher when the economy is strong, as consumers have more to spend on imports and there are more foreign investment opportunities.
Despite the evidence that trade deficits are not inherently bad, and that America will always have an overall trade deficit if spending outstrips saving, the USTR wants to renegotiate NAFTA to “reduce the trade deficit with the NAFTA countries.” Many economists observe that the president would need to implement tariffs and reduce trade to fix bilateral deficits.This would damage the U.S. economy and relations with NAFTA partners. A trade war with Mexico, for example, could kill 300,000 U.S. jobs within a year, according to Moody’s Investors Service, and the damage caused to Mexico’s economy could create greater instability on America’s southern border. The Trump administration wants to address trade deficits, but protectionism to correct bilateral imbalances would harm the United States economically and politically without reducing the aggregate deficit.
3. “Together, we’re going to do everything in our power to make sure that more products are stamped with those wonderful words: ‘Made in the U.S.A.’” —Donald Trump, remarks on the Buy American, Hire American executive order, Kenosha, Wisconsin, April 18, 2017.
“One of the most important things we need to do as a country through the bilateral negotiation process is increase the rules of origin, which specify how much of a product has to be made in the U.S.A.… [You] wind up assembling products with a lot of foreign components.” —Peter Navarro, interview with Bloomberg, March 15.
Trump wants to increase NAFTA’s rules of origin (ROO), or how much of a product must consist of member-country-produced parts to avoid tariffs. His negotiators seek to strengthen the absolute standards and to mandate that a certain percentage of product components come from the United States, which has met stiff resistance from Canada and Mexico. To the administration’s credit, current ROO have loopholes. For example, one rule nominally requires that 62.5 percent of a vehicle be made of North American components, but cars with as little as 53 percent regional content freely cross U.S. borders. Even liberal analysts like Harvard economist Larry Summers and the Mexico Institute’s Christopher Wilson support more stringent ROO to support U.S. industry.
However, industrial organizations like the Association of Global Automakers and the Motor and Equipment Manufacturers Association fear that significant changes to ROO could increase production costs and make U.S. manufacturing less competitive. Under NAFTA, member countries developed supply chains that move intermediate goods across borders where assembly is most efficient. For example, according to MIT’s Observatory of Economic Complexity (OEC), in 2015 the United States imported $21.3 billion in vehicle parts from Mexico but also exported $15.1 billion there. In fact, USITC economists observe that 40 percent of the content of U.S. imports from Mexico and 25 percent of the content of imports from Canada is American. Without access to NAFTA’s supply networks, U.S. firms would lose significant ground to foreign rivals. Gordon Hanson, co-author of a study attributing U.S. job loss to China rather than NAFTA, observed that “without the ability to move lower-wage jobs to Mexico we would have lost the whole [auto] industry” to competition. While closing ROO loopholes is a sensible update to NAFTA, rewriting the agreement to force more production to occur in the United States would put U.S. businesses at risk.
4. “China, and many others, are taking advantage of the [United States] with our terrible trade pacts.” —Donald Trump, tweet, June 29, 2016.
“Mexico’s trade deficit with China is approximately equal to their trade surplus with us. It’s not an accident.” —Commerce Secretary Wilbur Ross, interview on CNBC’s Squawk Box, April 27, 2017.
Trump is right to accuse China of cheating on many of its trade obligations, but the claim that it colludes with Mexico to dump cheap goods into U.S. markets tariff-free using NAFTA is absurd. OEC data indicate that the main goods within the $291 billion in U.S. goods imports in 2015 from Mexico were cars and vehicle parts ($45.3 billion), trucks ($19.6 billion), and computers ($17 billion). In 2015, Mexico imported $64 billion in goods from China, purchasing computers ($5.5 billion), office machine parts ($4 billion), and telephones ($4 billion); vehicle part imports were only $1.73 billion. U.S. manufacturers are not worried about Chinese components capturing NAFTA’s benefits through supply chains. The American Automotive Policy Council, which represents Ford and General Motors, noted that “less than 6 percent of the auto parts consumed in the United States and Mexico are imported from China” under NAFTA.
Rather than being a partner with Mexico, China is one of its main competitors. Economists Kevin Gallagher and Enrique Dussel Peters observe that 62 percent of U.S. exports to Mexico and 36 percent of Mexican exports to the United States are losing market share to Chinese goods. Mexico would only want to turn to China if it believes the United States is not a reliable economic partner. For instance, after then-president-elect Trump took credit for Ford’s decision not to build a $1.6 billion Mexican factory, Mexico accepted a $210 million investment from Chinese automaker JAC, suggesting that China desires to exploit rifts in U.S.-Mexico relations. U.S. assertions that Mexico and China exploit America ironically bring the two nations closer together, jeopardizing U.S. economic and geopolitical interests.
5. “[Other countries are] dumping steel and destroying our steel industry, they’ve been doing it for decades, and I’m stopping it.… There are two ways—quotas and tariffs.” —Donald Trump, comments to reporters on Air Force One, July 13, 2017.
“[Anti-dumping laws for steel create] a fairly porous system, and…it doesn’t solve the whole problem. So we’re groping here to see whether the facts warrant a more comprehensive solution….” —Wilbur Ross, press briefing on the Memorandum Regarding the Investigation Pursuant to Section 232 (B) of the Trade Expansion Act, April 20, 2017.
At first glance, the president’s frequent discussion of steel tariffs for national security reasons has little to do with NAFTA. However, the USTR list of objectives contains a provision to “eliminate the NAFTA global safeguard exclusion,” which allows member countries to apply for exemptions to blanket tariffs designed to protect domestic industries. Although Canada and Mexico would not be able to avoid a national security tariff, this new demand would remove their immunity to taxes like the one President Bush applied in 2002 on steel, which the Trump administration could imitate.
The administration’s justifications for protecting U.S. steel are questionable. The United States is mostly self-sufficient regarding national security; only 6.4 percent of U.S. military spending went to non-U.S. firms in 2013, and only 3 percent of U.S. steel shipments in 2016 supported national security. Moreover, compared to the 78.6 million metric tons (mmt) of steel U.S. firms produced in 2016, China sent only 0.8 mmt of steel to U.S. markets because of anti-dumping laws. Canada and Mexico sent a combined 7.9 mmt. Blanket steel tariffs would hurt NAFTA partners more than China. Steel tariffs would also increase prices, harming the U.S. economy because more American businesses consume steel than produce it. When the Bush administration enacted duties on foreign steel, a study from the Consuming Industries Trade Action Coalition found that, by the end of the tariffs’ first year, 200,000 workers lost their jobs amid steel cost hikes. Given robust North American economic integration, subjecting NAFTA partners to steel taxes could cause such measures to inflict more pain. Removing tariff exemptions both degrades relations with America’s neighbors and creates economic problems.
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To be sure, many experts believe that NAFTA needs an update, and several sections on the USTR list of objectives, including “digital trade in goods and services and cross-border data flows” and “intellectual property,” contain important revisions to the agreement. The renegotiation could produce a positive outcome for all parties, including the United States. However, if Trump continues to prefer “alternative facts” that sound appealing to his political base but have no economic justification, he will hurt the American workers and businesses he says he wants to protect and seriously damage U.S. relationships with Canada and Mexico.
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