A Future for NAFTA?

The ascendancy of Donald Trump to the presidency has meant that the US administration will no longer tolerate to be “ripped off” by other trading partners around the world. Trump had denounced the “stupid” trade agreements such as NAFTA, which have allowed American corporations to set up shop in Mexico, shift to low-cost Mexican workers close to the US-Mexican border and ship the finished goods back to the US, where it is sold for final consumption. Big corporations have sold the trade deal as a boon to consumers who are able to consume cheaper goods (while generating more profits for themselves), and the Mexican government sold it as an economic and jobs bonanza.

Both arguments are somewhat correct, but are tempered by undesirable side effects. Firstly, the consumer good bonanza is tempered by the loss of 356,000 US jobs, primarily in manufacturing, that were caused by the relocation of jobs to Mexico. While overall economic growth and an expanding service sector allowed for a reabsorption of the unemployed into the labor market, the trade-related displacement of manufacturing jobs tend to be concentrated among higher wage workers. To the extent, that trade-displaced workers find jobs elsewhere, they tend to pay less. Critics of the trade-displacement argument cite the fact that US manufacturing production has increased. Thus, automation is another major factor for employment reductions in manufacturing. However, trade may reduce jobs as in the case of trade with China, in which the US has swiftly lost 6 million manufacturing jobs since China joined the WTO. In any case, the emotional insecurity of the American working class with regard to job stability and the permanent threat that their jobs could be on the line for offshoring if they complained too harshly has given legitimacy to the protectionist rhetoric of the current administration.

Secondly, the net gains to manufacturing employment in Mexico (half a million in the years following NAFTA) were compensated by the loss of 2 million agricultural jobs as a result of the increase in agricultural imports from the US following trade liberalization. Subsidized and industrial-style agriculture in the US meant that Mexican small-scale farmers could not possibly compete with the low prices of US food items, which also tend to be unhealthy processed foods, which resulted in a spike of obesity and other lifestyle-related illnesses in the Mexican population. Another challenge has been the failure of wages to rise, partly as a result of declining unionization (which went from 22.4% in the early 1990s to 13% in 2012). Mexican workers had difficulties to bargain for better wages as NAFTA encouraged the investment in facilities in northern Mexico, where the large number of internal migrants from poorer provinces allowed for a huge labor pool and permanent competition for jobs. While the rising dependence of the Mexican economy on exports to the US allowed for an increase in the national GDP, the common population complains about rising inequality and a lack of wage rises. It is not surprising that Andres Obrador, a center-left politician, who campaigned on the expansion of the welfare state and the fight of corruption in the political system (while being silent on NAFTA), got elected president in June.

The short-term effect of NAFTA has been a spike of Mexican migration to the US, who ironically took on jobs in the very agricultural sector that destroyed their livelihoods back home. Mexican migration to the US, in turn, formed the populist basis of Donald Trump’s border-building and deportation campaign (deportations were stepped up under the Obama administration), even though net migration has returned to zero since 2008. The increased border crossings since then have come mostly from El Salvador, Nicaragua, Honduras and other very poor Central American states, which the US has been countering the last few years by bribing the Mexican government to step up its own border enforcement in the southern border of Mexico. Compared to Europe, the US has been fairly privileged in its high selection criteria for immigration. Even amid the political turmoil in Central America, Africa and the Middle East, the US took on 80,000 refugees in 2016, over 53,000 in 2017 and set an even lower cap of 45,000 in 2018 (Pew Research 2018). These are hardly earth-shattering figures compared to Turkey, Lebanon or even Germany.

Even while it is true that NAFTA has allowed the economies to become more integrated and grow, the benefits have been unevenly applied, as it created frustration potential among both the Mexican and the US working class, while Mexican and US producers can look forward to increased profits. But now that the NAFTA agreement has been in place for the last 24 years, it is also hardly feasible to retreat from the agreement. Trump’s political ascendancy meant an increase in market uncertainty, as he refused the decorum of the political consensus in the US. But as long as he was just attacking his political opponents, it was not clear whether his trade-bellicose rhetoric would have any implications on policy. But it has been getting serious since about the beginning of 2018, when the US trade war with the rest of the world began.

Trump claimed that the US cannot lose a tariff war with other states, because the negative US trade balance would put the greater burden on the trade surplus countries, who are harmed proportionately more by tariffs than the US. Trump thinks the US trade balance should be turned positive, even though the US has provided the buyer-of-last-resort position of the world consistently for the last 30 odd years. Given that Germany has forced the same trade surplus position on other Eurozone countries, it is hardly feasible in the absence of interplanetary trade to think of another country, who can absorb the goods of surplus-producing countries.

In addition, Trump’s logic on the self-limited harm of tariff wars does not hold up neatly, because retaliatory tariffs can be very painful for selected domestic producers. Farmers have lobbied Congress for an increase of subsidies following the imposition of agricultural tariffs of other states (Europe, Canada, Mexico and China among others). It got a $12 billion bailout, which the Trump administration might consider a cheap cost to bear in the long game to “win” the trade war with other nations. But as more and more industries are affected by an increase in tariffs, and thus might have crucial export markets made unviable, there will be other industries that will ask for a government bailout, which might create costs so high that they cancel any benefits from tariffs.

Another problem is the interrelated nature of the global economy. Complex products like a smartphone may have the label “assembled in China”, but many parts are produced in the US, Germany, UK, Japan and South Korea. The imposition of tariffs on foreign-labeled products could backfire on domestic manufacturers, who have to carry the costs of the tariff and if made unviable could result in layoffs at home. This is the opposite of what Trump would have intended.

Given the high stakes, Mexico and the US have hammered out an agreement, which among others, increased the North American content requirement (from 62 to 75%) for external goods wanting to enter North America tariff-free. Further, 40% of car components need to be manufactured by workers earning at least $16 an hour, which could shift some production back to the US or at least raise the wage requirements for Mexican workers. Other details of the renegotiated bilateral agreement have not emerged from the published press reports, but Trump sells it as a big win for the US workers. The outgoing Mexican president Enrique Pena Nieto can sell the deal as a political win for Mexico (and even if not, he won’t be accountable for it after stepping down), even though the incoming president Obrador has not made any statements on this deal in public. He does not want to take credit or blame for the new deal, and, therefore, wants the quick passage of the deal.

The quick passage may be hindered by Canada’s opposition. Canada has not signed onto this bilateral agreement, but have agreed to trade talks with the US in the coming days. Trump leaked the message that he did not want to make any compromises with Canada and hopes to have a bilateral US-Mexico agreement on which Canada can sign up to later. I am not sure whether this political theater has any larger significance other than Trump’s belief that the US can get a better deal when negotiating in a bilateral manner. Canada does not want Article 19 of NAFTA to be repealed, which regulates disputes over levies and anti-dumping rules. For any trade disputes among the three NAFTA countries, an expert panel made up of both countries’ representatives would handle these disputes as opposed to leaving it to the domestic courts. Canada is also fighting to protect its steel, aluminum, auto, dairy and lumber industries from the US duties that were imposed in the recent past.

More readings:

https://en.wikipedia.org/wiki/NAFTA%27s_effect_on_United_States_employment

https://en.wikipedia.org/wiki/Effects_of_NAFTA_on_Mexico

https://www.washingtonexaminer.com/policy/economy/mexicos-new-president-is-a-wild-card-in-the-battle-over-trumps-new-nafta

https://www.reuters.com/article/us-trade-nafta/u-s-canada-trade-talks-grind-on-but-final-issues-unresolved-idUSKCN1LM1VN

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