Mexico and Canada Push Back, Strike Their Own Trade Deals
After the latest round of talks ending January 28 in Montreal, U.S., Canadian and Mexican officials expressed optimism but noted there is still much work to be done to modernize the 24-year North American Free Trade Agreement.
This cautious optimism is a notable improvement from the combative atmosphere that marked the previous round, when many feared talks would break down amid threats by U.S. President Trump that the U.S. is ready to withdraw from $1.2 trillion pact.
Blaming the 1994 treaty for manufacturing job losses and a trade deficit with Mexico, Trump has warned the U.S. will pull out unless major changes are made. The U.S. currently has a $63 billion trade deficit with Mexico and a $12 billion to 15 billion (depending on whom you ask) trade surplus with Canada.
The next round of talks is scheduled for February 26 through March 6 in Mexico City.
Canada, Mexico Move Beyond NAFTA
While Trump pushes Canada and Mexico to accept his NAFTA revisions, the two countries are moving forward with new trade pacts of their own in a more diversified global marketplace.
Canada and Mexico have agreed to a Trans-Pacific Partnership with nine Pacific Rim nations and the Pacific Alliance, which includes Colombia, Peru, Chile, Singapore, Australia and New Zealand. The U.S. is out of both. Mexico is negotiating with the European Union. Last fall, Canada’s trade agreement with the union went into effect.
Clearly, the countries have other options, and U.S. critics warn Trump is overplaying his hand.
Mexico: Unmet Expectations
Mexico is not a big NAFTA fan, but it does not want to see it repealed. When joining NAFTA 24 years ago, Mexico thought the treaty would boost economic development by adding middle-class jobs and helping millions of Mexicans out of poverty. NAFTA’s economic impact has been much milder than expected, though it has attracted foreign investment and strengthened exports.
The landscape could change. President Trump recently announced a new tax on foreign-made washing machines that starts at 20 percent for the first 1.2 million washers imported this year and goes up to 50 percent for every washer after that. The goal is to drive American consumers away from foreign-made washers and toward those made in the U.S.
Mexico could retaliate by shifting its soy and corn imports from the U.S. to Brazil and Argentina. Conflicts over trade already have started cutting into sales of U.S. farmers, with Mexican imports of soybean meal dropping 15 percent and corn imports falling 6 percent in the first four months of 2017. Mexico is the largest U.S. export market for those commodities.
Canada: Pushing Back
While U.S. trade officials describe talks with Canada as “progressing very slowly,” Canada Prime Minister Justin Trudeau said two days after the latest round of talks ended that Canada would walk away from NAFTA over “multiple issues,” noting he would not accept a “bad deal.”
The allies have argued about lumber, dairy, newsprint, but it is the trade surplus that has the U.S. worried, while the Canadians sweat over elimination of a dispute resolution process, a U.S.-proposed “sunset” clause that would cancel the treaty after five years unless the parties agree to extend it, and a U.S. demand for higher U.S.-content (85 percent vs the current 62.5 percent) in North American-built cars required to qualify for NAFTA’s tariff-free rules.
NAFTA’S Economic Impact
NAFTA, effective in January 1994 with terms gradually implemented through January 2008, eliminated most tariffs on products traded among the U.S., Canada and Mexico. The treaty mostly focused on freeing trade in agriculture, textiles and automotive manufacturing, as well as on protecting intellectual property, establishing dispute resolution systems and implementing labor and environmental safeguards.
Most economists agree that NAFTA has been beneficial to the region’s economies. Trade surged during the first 20 years, from about $290 billion in 1993 to $1.2 trillion in 2017. But debate continues about NAFTA’s impact on jobs and wages due to increased competition.
NAFTA and the U.S. Economy
Today, more than a third of all U.S. exports end up in Canada and Mexico. According to most estimates, NAFTA has had a modest impact on the U.S. gross domestic product of less than 0.5 percent, or about $80 billion, after fully implemented.
Critics blame the treaty for losing some 600,000 manufacturing jobs, lowering wages and driving companies to relocate to cheaper Mexico. Supporters claim NAFTA annually creates about 200,000 jobs in the U.S., noting these pay 15-20 percent more than the production jobs lost.
It has been said that the industry was in trouble before NAFTA, and that China’s joining the WTO in 2001 and the disruption caused by technology and the Information Age are to blame for manufacturing’s woes.
NAFTA and the Mexican Economy
In the past two decades, NAFTA has tripled Mexican farm exports to the U.S. and created hundreds of thousands of auto manufacturing jobs.
But the pact has failed to live up to expectations for economic growth, higher wages and lower emigration. The economy grew at an annual 1.3. The wage convergence between the U.S. and Mexico that was hoped for did not happen. Unemployment rose. Poverty levels have not changed.
Some economists point out NAFTA was good for the industrial north and bad for the agrarian south, putting millions of Mexican farmers out of work as they lost to heavily subsidized U.S. agriculture and doubling migration to the U.S. after 1994.
NAFTA and the Canadian Economy
Canada has done well under NAFTA. Cross-border U.S. and Mexican investment in Canada has tripled since 1993. Exports to the U.S. have risen from $110 billion to $346 billion. Agricultural trade has more than tripled. The manufacturing industry has stayed more or less the same.
If the U.S. Withdraws
President Trump may be under the impression that withdrawing from NAFTA would reduce the U.S. trade deficit with Mexico, but economists beg to differ.
With the U.S. out of the treaty, the countries would revert to Most Favored Nation status as members of the WTO, which limits the tariffs they can charge to 2.8 percent for the U.S. and 4.5 percent for Mexico, according to a Forbes report. If the U.S. raised its tariffs on Mexican imports, it would have to raise them on imports from other trading partners.
It is difficult to see how withdrawing from NAFTA would benefit the U.S., as it would not create jobs but instead slow economic growth, increase the U.S. trade deficit with Mexico and other countries, raise inflation, and put the 14 million jobs that rely on NAFTA at risk, Forbes reported. Canada and Mexico, meanwhile, would continue to pursue trade deals with other countries.