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President Trump and NAFTA

Ed Calley and Griffin Scott

The North American Free Trade Agreement or NAFTA was implemented in 1994 in order to encourage economic activity between the United States, Canada, and Mexico. After being enacted, tariffs in all three countries were removed and measures were enacted to facilitate greater trade in the region. The overall effects of NAFTA are unclear due to the variety of issues that affect the economy. However, regional trade in North America increased dramatically after the enactment of the agreement. The major concern with NAFTA was job loss in the United States, specifically in the auto industry. Since the enactment of the agreement, many manufacturing jobs were lost to Mexico as it became easier for companies to establish assembly plants in Mexico where wages are considerably lower than in the U.S.

Another issue with NAFTA for the U.S. is the increasing trade deficit with Mexico. The total impact of NAFTA on the U.S. economy is estimated to be relatively low as the level of trade with Canada and Mexico is comparatively only a small portion of GDP. However, there are several other benefits of the trade agreement. Overall, U.S. trade in the automotive industry has increased drastically since the deal. The deal has allowed the automotive industry to become more globally competitive due to the development of supply chains and better economic integration in North America. Another important result of NAFTA is the idea of production sharing between the three countries. It is interesting to note that due to production sharing it is estimated that 40% of U.S. imports from Mexico and 25% of imports from Canada originated in the United States. Overall the agreement has allowed for a huge increase in trade for the automotive industry.

Trump has criticized NAFTA, which was put into effect in 1994, calling it the "worst trade deal ever made.” He has publicly blamed the agreement for the loss of manufacturing jobs and has claimed it significantly contributes towards our trade deficit. To put the implication of NAFTA into perspective, more than a third of U.S. exports stream to Canada and Mexico. Because of this, the NAFTA renegotiations have been closely followed by business and labor groups to see how Trump's team will prioritize objectives and ultimately respond in the renegotiations.

In the Summary of Objectives for the NAFTA Renegotiation released by the Office of the United States Trade Representative, the agency proposes a plan to reduce the U.S. trade deficit with Mexico, restrict the quantity of imported material, and eliminate a controversial mechanism to review trade disputes. The summary calls for the United States to reduce its trade deficit with NAFTA countries. Trump has been extremely vocal on bilateral deficits—when the US import more from a trading partner than export to the respective country—because he believes the deficits signal a broken trading agreement. Furthermore, the document details rule changes to govern the trade of services, such as telecommunications, and digital goods, such as music and electronic books. Trump also prioritizes creating a mechanism to prevent the countries involved in NAFTA from manipulating their currency to gain an unfair competitive advantage, like China had employed to subsidize its exporters.

In contrast to many of Trump’s beliefs, there is a general consensus among economists regarding NAFTA, believing that it has benefited the U.S. economy by increasing trade and lowering the cost of consumer goods while hurting small groups whose jobs were relocated across the border. In 2012, a survey of 41 prominent economists concluded that nearly 90% felt the U.S. were better off under NAFTA than prior trade agreements. It will be interesting to see how the renegotiations transpire, and how effective Trump’s self-proclaimed mastery of deal-making truly is.

15 thoughts on “President Trump and NAFTA

  1. the prof

    We'll look later this term at the trade deficit issue. We've noted in passing in class that there's no reason to EVER expect bilateral trade to be balanced – think of a simple world where we import high-tech chips to Japan where they get made into circuits/components that get exported to China which assembles them and then exports cell phones to us. We run a large trade surplus with Japan, a large trade deficit with China, but the global net (in this case) would be the $2 in labor that China puts into each phone. Balanced global, imbalanced bilateral.

  2. ingramk20

    Considering Trump's general inexperience, I'm not surprised that he considers imbalanced bilateral trade to be negative. However, I wonder to what degree Trump's economic advisors have explained to him the benefits of NAFTA. Do the U.S's negotiation objectives reflect Trump's will or are his advisors in agreement with him? I know Gary Cohn resigned as one of Trump's top economic advisors over disagreement about his proposed tariffs on steel and aluminum.

    1. mannm20

      This makes a really interesting point. Given the major changes in White House staffing based off of experts that Trump disagrees with, I think that Trump will find someone to back him as he implement his policies. I think the renegotiations reflect Trump's views and if it comes to a time when they no longer reflect his views, an advisor will be fired or quit. Regardless of Trump's inexperience with trade policies, he knows what he wants and will find someone to help him get it done.

  3. dodsonm20

    I would like to see some data to go along with the points made in this article. Specifically graphs showing how the economy has in fact benefited, albeit not as much as Mexico's economy but as we've said in class trade always has a country that wins more than another. There will always be someone better off than someone else when it comes to trade but the idea is that in the end everyone is left better off in general than if they did not trade at all.

    1. faithepinho

      Agreed. And are there any models of a world economy without NAFTA? Of course, no model could fully capture the extent of the impact if the U.S. were released from the agreement -- no matter how complex! Still, I would like to see some more substantial evidence of how exiting the agreement would affect the U.S. -- and international -- economy.

  4. dugganj20

    I think trade deals between other countries are necessary but certainly come with costs. For instance, when the U.S. became involved in the NAFTA trade agreement, many manufacturing jobs were lost to other countries, specifically Mexico. Thus, Americans lost jobs that were secure before the trade deal was made. However, benefits of the agreement revolve around specialization. With specialization, the cost of some consumer goods decreased for Americans.

    1. minsong20

      As President Trump attempts to renegotiate the deal, the question must be, how high do tariffs have to be in order to make trading with the US not worth it and thus close plants in our neighbors. Even as we see the deal change, the likelihood of new plants in the US opening is low due to the many factors involved. The manufacturing jobs will likely stay abroad and the prices the American consumers see will rise.

  5. bernsteinl20

    Since NAFTA was enacted in 1994, this has now become an integral part of our economy. If Trump were to heavily negotiate or even dissolve this trade agreement I can only imagine that the ramifications would be huge. While I don't know if measures that drastic are being considered, it makes you wonder how much thought he has put into it, since many people would probably be hurt by a move such as that.

  6. prochniaka20

    Calling NAFTA the "worst trade deal ever made" is extremely excessive and I doubt that Trump has logical, concrete reasons to back up his statement. It is concerning that Trump disagrees with 90% of 41 prominent economists, who clearly know more than Trump does.

    1. croughanm20

      I have to agree with Lexi here. It seems absurd that Trump could claim that NAFTA is "the worst trade deal ever made" when statistics are so blatantly on the side of NAFTA. Moreover, what is Trump supposing we should implement instead of NAFTA- or is it simply an attempt to repeal it and move on from there. Based on empirical statistics, to destroy NAFTA would be a significant hit to a well functioning system.

  7. bullr20

    Who would benefit from a renegotiation of NAFTA? Certainly not the auto industry-- but there must be some producer lobby Trump is pandering to...

  8. montjoyr20

    Do we have any idea what impact reducing the trade deficit would actually have on employment? If Mexico has a comparative advantage in manufacturing due to the cost of labor, it appears short sighted to attempt to revive traditional manufacturing labor by reducing the trade deficit. While it is relatively easy to gain support on the campaign trail with promises of increasing the availability of manufacturing jobs, I doubt that the impact of this policy will be as significant as President Trump has said. Ultimately, I feel like reducing the trade deficit with countries that have comparative advantages in manufacturing could likely reduce economic growth in the long run because it increases the costs of doing business domestically.

  9. riversc20

    We actually watched a documentary in LACS101 about maquiladoras, factories of US companies that have popped up on the Mexico border in order to produce goods using Mexico's cheap labor to then send back across the border, resulting in tax cuts for US companies. This is a prime example of American jobs being lost to cheap foreign labor, while rich American companies get tax cuts and a desperate Mexican government tolerates the pollution and horrible working conditions of the factories. While I find it logical for Trump to desire lowered trade deficits, I think a trade agreement with the two large, resourceful nations with which we share our borders can be a great thing. reform it if you'd like but calling it "the worst trade deal ever made" is dramatic. It may have caused a loss in manufacturing jobs, but at the price of tax cuts and cheap labor-- you win some and you lose some; Trump must use the renegotiations to decide what is most important to him.

  10. Mariam Samuel

    I think the benefits of NAFTA on increasing US trade is undeniable. I find that Trump takes each aspect of a countries policy separately instead of looking at the bigger picture. I don’t understand how he could expect Mexico to pay for “the wall” if they are actually running an increasing deficit with the U.S. Likewise, because of the interconnectedness of globalization, cutting off trade agreements would only increase prices of the so many goods which we import because we refuse to produce ourselves. One of our biggest sources of cheap labor and production is Mexico, and I think it is vital to maintain a good relationship with the country, considering we are, and will continue to, exploiting their resources.

  11. skinnerf20

    There seems to be very little benefit to US citizens in ending NAFTA. Even if more jobs are created in the states, ultimately those benefitting from these jobs will be hurt by increased consumption costs as production costs for many necessary goods rises.

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