Trump's Talk of Leaving NAFTA Is Thankfully Just Bluster
Some may have been concerned when President Trump told a rally in Phoenix on Tuesday that he would “end up probably terminating NAFTA … at some point.” But anyone who has read The Art of the Deal recognized a tactic he has boasted about – threatening to walk away. The truth is, the end of NAFTA would hurt all three partner countries. It would undermine U.S. competitiveness, eliminate jobs, and increase consumer prices. No U.S. President is willing to risk that.
No wonder the reaction from the governments of both NAFTA trading partners, Mexico and Canada, was essentially a yawn, with Mexico’s trade minister explaining that this is just Trump’s negotiating style. But Trump may have gone to the well too many times, agreeing to renegotiate NAFTA after already threatening to pull out. Christopher Sands, director of Canadian studies at the Nitze School of Advanced International Politics, said people are getting used to “the way Trump bluffs with statements like ‘we’ll pull away from NAFTA.’”
Anyone who wants to consider why the United States would not terminate NAFTA only has to look at the numbers. The agreement has led to the creation of 5 million jobs in the United States, including 800,000 in manufacturing. That includes a lot of votes in battleground states. Exports of goods to Mexico and Canada have more than tripled, from $142 billion to $517 billion. While imports of goods have also increased, to $590 billion, when you take into account service trade, the U.S. negative trade balance amounts to little more than a rounding error.
From the point of view of American businesses and consumers, the fact that goods can move smoothly and tariff-free across the three countries’ borders isn’t a bug, it’s a feature. Even imports from Mexico and Canada help create jobs in the United States, reducing overall production costs and making American products more competitive. Major companies like GM, IBM, and Coca-Cola conduct part of their manufacturing in Mexico, and ship products back into the United States tariff-free, allowing them to sell domestically and around the world at a lower price. Many smaller U.S. companies have been able to compete and survive by outsourcing production of some components. In fact, 40 percent of U.S. imports from Mexico originate with U.S. companies and contain American designed and made parts.
One of the best examples of NAFTA’s benefits is the auto industry. Today, an American car is actually a North American car, with most vehicles made on this continent containing parts sourced in all three countries. The creation and extension of NAFTA-wide supply chains have allowed Detroit-based auto companies to modernize their industry and drive down costs. If you work at an auto or auto parts plant in Michigan or Ohio, your job may be more secure because of parts made in Mexico or Canada.
NAFTA has helped U.S. companies compete by protecting intellectual property (a feature that hopefully will be improved in the current negotiations). It has helped the Federal Reserve Board keep down interest rates by lessening the risk of inflation. And it has helped U.S. companies pursue profitable investments, especially in Canada, by allowing investors to sue foreign governments without first pursuing legal action in the host country’s court system. Under this investor-state dispute settlement mechanism, Canada has lost or settled six claims paying a total of $170 million in damages, Mexico has lost five cases and paid out $204 million, while the United States has won 11 cases without a single loss. With that 11-0 record, giving up this provision would carry a big cost to American companies.
Perhaps the sector that would be most visibly hurt by a disruption of trade with Mexico is agriculture. This past spring, when Trump threatened to pull out of the agreement, Agriculture Secretary Sonny Perdue sat him down and explained how important access to the Mexican market is for American farmers and agribusinesses. While U.S. farm exports have increased by 65 percent to the rest of the world, they have grown by over 150 percent to Mexico and Canada. In fact, Mexico is the top export destination for U.S.-grown beef, rice, soybean meal, corn sweetener, apples and beans. It is the second-largest export destination for corn, soybeans and oils. Chances are, if you live in a rural county colored red on the electoral map, you owe your job or a big chunk of your living to NAFTA.
Anyone trying to assess whether Trump will pull the plug would be well advised to go back to The Art of the Deal. “If the price isn’t right,” the book advises, “be willing to walk away.” For Americans, as well as Mexicans and Canadians, the price of walking away from NAFTA would simply be too high.
