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.