With NAFTA, Trump May End Up With the Deal He Started With
It was like a scene out of The Art of the Deal. When President Donald Trump threatened to pull out of NAFTA and then agreed only to simple renegotiation, it read like the advice Trump gave in the book he loves to cite. Threaten to walk away, that gives you more leverage. But Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto have leverage too, and they shouldn’t allow themselves to be bullied, like some land developer or contractor without options. Canada and Mexico have cards to play – and they should play them.
The first thing to keep in mind in these negotiations is that Trump is not, as he insists, just looking for a fair deal. He’s looking for a faux mercantilist advantage that will allow the United States to export more to Mexico and Canada than it imports. But the goal of free trade isn’t to export more than you import; the goal is to facilitate the overall creation of wealth. More to the point, the goal is to "get" in return for production. That is what NAFTA does, and has always done for the United States and both of its neighbors, by providing things the U.S. economy needs – goods and services, secure access, stable relationships, a positive business environment, and a large base of workers.
If you want to get a sense of one of the ways NAFTA benefits the United States, just ask Rick Turner, a senior manager for a jean company based in Mauldin, S.C. Turner has told CNN that “without NAFTA, we would be out of business.” Turner’s plant exports 85 percent of its denim duty-free to Mexico, where it is cut and sewn into their jeans, and then shipped back to the United States to be sold. That practice, made possible by NAFTA, has allowed the South Carolina plant to compete and survive – and maintain jobs for its 2700 workers.
That is one of the ways NAFTA works. Part of it, no doubt, involves job creation in Mexico. Logically. But doing so allows thousands of jobs – millions nation-wide – to survive. Mercantilists might prefer if they could cling to every job. But trying to do that would only make the overall price – of the jeans made at the South Carolina plant, for example – uncompetitive. Locating some jobs in Mexico makes the South Carolina jeans company, and others across the United States, more competitive and their jobs secure.
To what extent are U.S. companies using Mexico to ensure their ability to compete? A huge extent. According to the non-partisan Congressional Research Service, about 40 percent of the goods Mexico exports to the United States actually originate in the United States. About 25 percent of the goods Canada exports to the United States originate in the U.S. About 11 million U.S. jobs depend on trade with Mexico and Canada, five million with Mexico alone according to the U.S. Chamber of Commerce.
Some may think that the trade deal primarily benefits Mexico. But the numbers tell a different story. Since NAFTA came into effect, U.S. GDP has grown 39 percent. Canadian GDP grew slightly more, about 40 percent. But Mexico’s economy grew only 24 percent, even though it had a smaller economy, about one-fifth the size of the United States before the agreement was even penned. And much of that U.S. growth comes because outsourcing to their NAFTA partners makes U.S. companies more competitive (like the jeans company). It also comes from trade with Canada (the 2nd largest U.S. trading partner) and Mexico (the 3rd largest.) Much of that is in exports. Last year, the United States exported $266 billion in goods to Canada, importing just a little more, $278 billion. The U.S. exported $230 billion in goods to Mexico, importing $294 billion. But it is important to keep in mind that these figures include oil, which the United States depends on heavily. Four out of every 10 barrels of oil imported into the United States comes from Canada (American’s biggest oil supplier), and two out of every 10 come from Mexico, greatly relieving the amount it must purchase from less stable countries like Saudi Arabia and Venezuela.
President Trump may not like Mexico’s VAT tax, which passes on taxes on imports, but not to Mexican exporters. But about 160 countries engage in that practice, including the entire EU. The Trump administration is still considering something comparable, in the form of a Border Adjustment Tax (BAT). Mexico and Canada will come to the table with demands as well. Mexico, for example, wants the United States to guarantee the right of Mexican trucks to use U.S. roads, which was originally promised in NAFTA negotiations but subsequently withdrawn.
President Trump may not realize the benefits of NAFTA, but many others do. In a recent Wall Street Journal-NBC News survey, 57 percent of respondents favor the agreement, compared to only 37 percent who oppose it. Many members of Congress – including Republicans – know how the agreement has benefited their constituents. But NAFTA’s biggest booster in the United States is the business community, including the Chamber of Commerce. Eventually, President Trump will bow to knowledgeable opinion (and to reality) – as he did on relations with China, participation in NATO, cooperation with Japan and South Korea, and even maintaining the Export-Import Bank.
Canada and Mexico shouldn’t consider folding – they have strong hands to play.
