The Trump administration is reportedly mulling over an executive order to officially withdraw from the North American Free Trade Agreement (NAFTA). Trump’s protectionist tendencies have been one of the few policy positions he has been consistent on throughout his career, and he has particularly targeted NAFTA, calling it “very, very bad for our country” and promising “to make some very big changes or we are going to get rid of NAFTA once and for all.”
Here are seven things you need to know about Trump potentially withdrawing from NAFTA.
1. Trump’s precise problems with NAFTA have never been specified. Trade expert Chad P. Bown noted that Trump’s comments in railing against NAFTA have tended to focus on vague generalities about trade deficits (which are irrelevant) and promises of keeping companies from leaving the United States.
2. The executive order could be leverage to strong-arm Canada and Mexico into re-negotiating NAFTA. That’s what the initial Politico report speculated; however, the outlet pointed out that “once Trump sets the withdrawal process in motion, the prospects for the U.S. pulling out of one of the largest trade deals on the globe become very real.” According to MarketWatch, a Trumpified NAFTA would entail modifying the rules of origin so more automobile parts originate in the U.S. and other NAFTA countries (the current rule of origin has 62.5 percent originating from NAFTA countries) as well as strengthening “labor and environmental standards.”
3. If Trump does withdraw the U.S. from NAFTA, then the country would revert back to prior trade agreements. According to Bown, nixing NAFTA could result in the U.S., Canada and Mexico using the same tariffs they use for other World Trade Organization (WTO) countries toward each other, meaning that “new U.S. tariffs on imports from Canada and Mexico could increase to an average of 3.5 percent. For new trade barriers facing U.S. exporters, Canada’s import tariffs would increase to 4.2 percent and Mexico’s would increase to 7.5 percent.” Under NAFTA, tariffs were zeroed out between the three countries.
Another possible outcome of the withdrawal from NAFTA could be the U.S. and Canada resorting to their trade agreement prior to NAFTA, where trade between the two countries didn’t feature any tariffs, while Mexico and Canada can keep NAFTA in place for trade between those two countries, per Bown. This would essentially mean that withdrawing from NAFTA would mostly harm trade between the U.S. and Mexico.
4. Withdrawing from NAFTA would disrupt supply chains. Economist James Pethokoukis highlighted a New York Times article noting that NAFTA has fused the U.S., Canada and Mexico into “a single integrated economy” that has caused “improved competitiveness of American companies in the global auto market since the 1990s” due to “more efficient North American supply chains.” Therefore, withdrawing from NAFTA would be detrimental to the automobile industry – especially in the U.S. and Mexico – as well as the economy as a whole.
5. Trade with Mexico is responsible for almost five million jobs in the U.S. If MarketWatch is correct that the trade deal has created nearly 5 million jobs, then it follows that those jobs and similar future job creation could be at risk.
6. NAFTA is not responsible for job losses. NAFTA is a convenient political scapegoat, but the data simply does not support the protectionists’ assertions that NAFTA has resulted in job losses. According to a 2015 Congressional Research Service paper, “NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters. The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP.”
Additionally, trade attorney Scott Lincicome has pointed out that there is no evidence to suggest that U.S. productivity has slowed after the passage of NAFTA:
Meanwhile, it is a myth that the United States “doesn’t make anything anymore” or that trade agreements have caused a “giant sucking sound” as investment and jobs go elsewhere. Our manufacturers continue to set production and export records, and the United States is the world’s second-largest manufacturer (17.2 percent of total global output) and third-largest exporter. America also remains the world’s top destination for foreign direct investment ($384 billion in 2015 alone) — more than double second-place Hong Kong and almost triple third-place China. Much of this investment went to U.S. manufacturing assets, as shiny new BMW, Toyota, and other foreign-owned plants across the American South attest.
Lincicome also pointed to research from the Peterson Institute concluding that free trade has resulted in “between $2,800 and $5,000 in additional income for the average American and between $7,100 and $12,900 for the average household,” primarily benefiting those in the poor and middle class. The job losses that have occurred in the manufacturing industry have been the result of automation, not trade agreements like NAFTA.
7. Trump’s move to potentially withdraw from NAFTA is politics, pure and simple. The rise of populist anger in the U.S. has created an atmosphere that is more hostile to trade, particularly in the Rust Belt states that propelled Trump to the White House. Possibly withdrawing from NAFTA then appeases Trump’s voting bloc in those states, creating a scenario in which politics breeds bad economics. But Trump thus far has shown that he only cares about what gains him popularity, not necessarily doing what is right for the country.