President Trump has taken his first steps toward an “America first” approach to international trade, pulling out of the Trans-Pacific Partnership on Monday and reaffirming his intent to renegotiate NAFTA, the North American Free Trade Agreement
What does this mean for US companies and American workers?
Trump’s executive order to withdraw from the TPP is anticlimactic. That agreement was already a dead-letter, having been disclaimed by both presidential candidates and never ratified by Congress.
But a new NAFTA could upend US-Mexican relations and disrupt whole sectors of the US economy.
It’s not that this 1994 free-trade agreement between the United States, Mexico, and Canada was an unmitigated success; its impact has been quite limited. But for two decades, US businesses have organized themselves according to NAFTA rules, forging economic ties that extend across borders.
If Trump reintroduces tariffs and trade restrictions, he could set off a chain reaction of national retrenchment, with businesses everywhere forced to pull back from longtime partners, while scrambling to find new workers, new suppliers, and new markets.
This risk is less pronounced for companies working across our northern border. The United States and Canada had their own free-trade pact even before NAFTA, which we could revert to. Plus, the two countries have similar economies, with comparable levels of wealth, which helps keep the relationship on an equal footing.
But look south and things are quite different. Mexico’s was (and is) a developing economy, in which the average income is less than half of that in the United States. And that discrepancy matters, because it gives US companies a good reason to relocate: cheap workers.
To be clear, there’s nothing necessarily wrong with allowing US companies to take advantage of cheap Mexican labor. Indeed, it’s part of the point of agreements like NAFTA.
By moving operations to Mexico, businesses can save money and pass the savings onto consumers — in the form of affordable clothing and cars, for example. And in the process, the whole US economy can become more productive, shifting routine tasks to lower-skilled Mexican workers while freeing American employees to move into higher-skill industries.
Trouble is, there isn’t much evidence of a NAFTA boom. When the Congressional Budget Office assessed NAFTA’s early impact in 2003, it found that the agreement may have helped expand the US economy by a few hundredths of a percent. And that finding was echoed in a 2015 report by the Congressional Research Service. Even in Mexico, where you might expect big gains from all those outsourced manufacturing jobs, the impact seemed scant.
And then there are the US job losses, which pile up because of a big imbalance in the US-Mexico relationship: They sell stuff to us, but we don’t sell nearly as much to them. This type of trade deficit costs us jobs because companies don’t hire people to make the stuff they aren’t able to sell.
How many jobs the United States has lost is in dispute, but it’s worth noting that even the high estimates aren’t all that high. The NAFTA-skeptical Economic Policy Institute pins it at about 40,000 jobs per year.
But note that there are over 145 million jobs across the United States, plus more than a million new ones in any decent year. Against this scale, 40,000 lost jobs barely registers, even when you account for the fact that many are concentrated in the Midwest. We don’t have a trade agreement with China, yet competition from that fast-rising country sucks away roughly 200,000 US jobs a year.
Here’s the final twist, though. Even if this is right, and the economic impact of NAFTA has been relatively small, that doesn’t mean Trump’s plans to renegotiate the agreement are somehow immaterial or insignificant.
With the wrong mix of tariffs and restrictions, the undoing of NAFTA could be much more damaging than the implementation ever was.
As an example, consider the joint US-Mexican auto industry. Before NAFTA, there was no such thing. US carmakers tended to get their materials in-country. But over time, they’ve come to rely more and more on parts — and whole vehicles — made in Mexico. The effect is not subtle: Since 1993 there has been a 679 percent increase in auto imports from Mexico.
It took decades to build up this level of integration. But if NAFTA 2.0 reintroduces tariffs on Mexican goods, carmakers could be forced to unwind this system on a much shorter time frame, with unpredictable effects on prices, supply chains, and the ability to produce quality cars.
No doubt, the US economy will ultimately adapt, whatever the new agreement brings. How long this will take is hard to say, since a lot depends on the renegotiated details. But what’s clear, for now, is that Trump is holding firm on this campaign promise. Despite the potential for short-term turmoil, he is ready to renegotiate a decades-old trade deal to help forge a more self-sufficient America.