PMC Weekly Review - January 27, 2017

A Macro View – Repeal of NAFTA – Winner or Loser?

As one of his first acts as President, Donald Trump signed a memo directing the US Trade Representative to withdraw from the Trans-Pacific Partnership (TPP), a trade deal between the US and 11 other countries that border the Pacific Ocean. At first glance, this was not shocking, as he promised to kill the TPP while campaigning and it was not likely to be ratified by Congress anyway. However, the impact is much more symbolic of things to come, as it demonstrates that President Trump aims to break from decades of US policy favoring free trade. 

The next prospective target for President Trump is the North American Free Trade Agreement (NAFTA).  NAFTA, which was enacted in 1994, is a three-way trade agreement among the United States, Mexico, and Canada. Its goal was to eliminate barriers to trade and investment among the three countries. President Trump has called NAFTA “the single worst trade agreement ever approved” in the US and promised, both on the campaign trail and as President, that he intends either to renegotiate or break it. This raises a number of questions, including: Does he have the authority to kill NAFTA on his own? What is the likelihood of this happening? Who benefits and who is hurt by changes to NAFTA?

First, it does appear that a President can withdraw from NAFTA without Congress’s approval. NAFTA’s Article 2205 states that a party may withdraw from NAFTA after giving six months’ notice. Whether this will happen is more difficult to determine, as scant precedent exists. The US has not broken a trade agreement since 1866, when it terminated the Canadian-American Reciprocity Treaty. Renegotiation, rather than a full withdrawal from NAFTA, is more probable. What would the US try to gain through negotiations? Trump has been light on details, other than saying he intends to make NAFTA “a lot better,” but his ultimate objective seems to be stopping the flow of jobs and factories to Mexico and bringing back higher-paying manufacturing jobs to the US.

Fundamentally, reshaping NAFTA will change the US economic landscape, with new winners and losers emerging. Protectionist trade policy enables the government to choose those winners and losers. If Trump’s policies work as intended, the American industrial worker potentially has the most to gain. NAFTA has cost the US 850,000 manufacturing jobs, according to some estimates. It also has been argued that NAFTA has put downward pressure on wages and hindered labor’s ability to bargain collectively.  Another potential winner is US manufacturing processes that are both labor-intensive and not highly automated. Mexico’s available cheap labor has been blamed for many US manufacturers’ inability to remain competitive. Although much of the US economy has improved, concentrated geographic pockets have experienced significant declines. These areas are hopeful they will reap the benefits of trade policy that protects US industry. Lastly, smaller companies are likely to benefit from a revised NAFTA, as the current deal is not as advantageous to smaller companies that lack resources as it is for large multi-nationals. 

There also will be losers, one of the most likely being multi-national corporations that have accessed cheaper labor and less regulation in Mexico. Industries that are particularly vulnerable are airplanes, automobiles, large agri-business, appliance makers, and energy corporations. The US consumer also will face higher prices for many goods, as producers will pass along any additional costs to consumers. In addition, major changes to NAFTA are expected to affect a wide array of jobs, as the US Chamber of Commerce has estimated that trade growth due to NAFTA has helped create five million jobs in the US.

President Trump, in his first week as President, has already signaled that he will not continue the US trade policy of the last several decades that favors fair trade. Rather, he seems to be transitioning to a more protectionist policy favoring US workers and manufacturers, which is apt to play out in a fight over NAFTA in the near future. Whether this ends in withdrawal from the agreement or only in its renegotiation is unknown. What is known is that it will redefine the terms of business for a range of stakeholders and reshape the economic landscape in the US, with new winners and new losers emerging.

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