Since his inauguration on January 20, Donald Trump has fulfilled some of his campaign promises with withdrawal or pursuit of major revisions from several existing or proposed agreements – the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership, the Paris Climate Agreement, and UNESCO membership.
Is the North American Free Trade Agreement next?
Trump has said that he does not believe multilateral trade agreements are positive arrangements for the US economy. In his blunt words, NAFTA is “the worst trade deal ever made”. At the same time, alluding to economic realities, he has said that “rather than terminating NAFTA, which would be a pretty big shock to the system, we will renegotiate”, claiming that he seeking a fair deal for American companies and workers.
There is evidence of the Trump administration’s ability to negotiate favourable outcomes from Trump and China, where campaign slogans were an opening bid in a high-stakes game, Trump granted Beijing’s request to endorse the One China policy, did not label China a currency manipulator, or levy 45% tariffs on Chinese imports. In return, America has received Chinese support for enforcing existing and secondary sanctions against North Korea, a pledge of a reduction in intellectual property rights violations, and an end to Chinese de-facto tariffs affecting imports of American automobiles as well as subsidies of Chinese exports of steel and other basic goods to the US.
Like the US domestic policymaking system, the US foreign policymaking process has a kaleidoscope of various interests, groups, and views seeking to affect the policy that emerges. This is one of the benefits of democracy and the US system in particular, where the people are the masters and government serves the public will.
The same kind of activism occurs in foreign policy where, since the 1990s, protecting US jobs and business have been the American public’s 2nd and 3rd foreign policy priorities. In the realm of foreign economic policy, competing views, interests and actors all vie for their positions and often successful policy emerges from this process. The following two examples of the environment and automobiles illustrate the range of involvement that went on during the 1994 NAFTA ratification process.
Building on efforts by President George H.W. Bush, in September 1993 his successor Bill Clinton began negotiating additional agreements on the environment and labor to overcome formidable Congressional opposition and address some areas which were deemed to be deficient in the proposed NAFTA. In committing to the additional agreements, Clinton and his administration increased the likelihood of NAFTA gaining enough votes to pass, tackling head on the concerns or senior government players.
With the shift, the Administration addressed fears that more lax environmental standards in Mexico would allow local producers to have lower production costs and potentially undercut US counterparts. For example, American companies are bound to certain standards on vehicle emissions, tracking and disposal of hazardous waste, and minimization of the risk of chemical accidents. In Mexico, operating directives were not very developed and not widely applied. For example, when NAFTA was initially proposed, DDT — a toxic compound formerly widely used as an insecticide — was banned in the US but was used by Mexican farmers. American farmers had to meet the higher costs of developing insecticides.
The creation of NAFTA also offers the example of the “rule of origin” of automobiles, how much of a good needed to be made in North America for it to be considered “North American” and qualify for preferential tariff treatment. The eventual decision reached was that 62.5% of a car needed to be made in North America to qualify, negotiating the US preference of 65% and that of Mexico and Canada for 60%.
Positions taken by the negotiators in the international arena were largely determined by powerful factions within the domestic arena. The US stance was a bargain with the “Big Three” automakers — General Motors, Ford and Chrysler — and auto parts makers. All three automakers had an interest in a reasonably high rule of origin, to make it more difficult for European and Japanese competitors to locate assembly plants in Canada and Mexico and thus ship finished automobiles to the US duty-free. But there were differences between the three: due to its joint venture with Izuzu in Canada, General Motors favored a rule of origin of 60% while Ford and Chrysler preferred a higher rule of around 70%. The makers of auto parts also differed, and strove for as high a percentage as possible to protect them from foreign competitors.
An Entrenched Agreement
The second pointer that the US will not withdraw from NAFTA is that the agreement’s framework and processes have become an entrenched feature of the American economy. Companies, industries, and individuals have adapted and in many cases adopted and arranged processes such as supply routes in line with the NAFTA framework. As a result, US farms increased their exports in the free trade area by approximately 600%, with Mexico now importing up to 70% of US corn, wheat, soybeans, wheat, meat, and cotton. Conversely, US consumption patterns have shifted, such as Americans eating around
six Mexican avocados a week in 2017 compared to one in 1994. Imports of Mexican beer and tequila have increased substantially, with the US primarily providing barley and malt to the Mexican producers.
NAFTA did cause losses in some communities, mainly for products in America which are less dependent on local conditions, such as furniture, clothes, shoes, washing machines, staplers, and brooms. Factories like Whirlpool, Nabisco, or the Swingline stapler factory relocated just south of the border to take advantage of cheaper labor in Mexico — up to 83% lower than in the US as well as avoiding tariffs for products to re-enter the American market.
In US communities where factories moved out, there were knock-on effects on local industries, and a deterioration in mental health and increase in opioid addiction.
Yet, if Donald Trump is correct to exclaim that communities in the USA were hurt by the NAFTA, there are many businesses, industries, and communities which have adapted and integrated their means of production within the NAFTA framework. For example, consider the importance of international trade to the state of Michigan. In Michigan, with a GDP of $487.2bn, exports and imports account for $189.4bn (39%). Both auto-related exports and auto-related imports were nine of the top 10 in each category in 2016, as Michigan automakers buy auto parts from Mexico and sell cars to Canada. Similarly, GDP in the state of Kentucky is $197.0bn with exports and imports estimated to make up $69.3bn (35.3%) in 2017. Kentucky is now the fourth-largest state truck producer and fifth-largest passenger car producer in the US, and home to four automotive assembly plants for GM, Ford, and Toyota.
Where’s the Upside of Withdrawal?
US withdrawal from NAFTA is also limited by economic conditions that do not appear to provide additional benefits. If US companies are looking to secure cheaper costs of production, then they can relocate their factories to other developing countries, such as India, or invest in automation or technological innovations to complete tasks. Mexico would also remain attractive to investors, with the WTO’s classification of Mexico as a developing country meaning a lower tariff for exports from Mexico to the USA if NAFTA was terminated.
Canada and the US have long been each other’s largest trading partners for over 150 years, and any NAFTA termination would lead to them likely reverting to the prior Canada-US Free Trade Agreement of 1987. In contrast, exclusion of Mexico from a trading relationship would not serve the US when there is a need for cooperation over common problems such as human trafficking, drug cartel dominance, criminal gangs, and illegal border crossings.
Adding up these considerations, it is unlikely that Trump and the US will simply tear up NAFTA when the first choice is to provide American companies and workers with a beneficial, renegotiated deal. US, Canadian, and Mexican governments can work with major domestic groups, businesses, and lawmakers to consider arrangements that would build on successes and direct the flow of prosperity to communities, areas, or industries which lost from the original agreement, producing an even more effective, beneficial NAFTA.