WASHINGTON – President Donald Trump, engaged in a diplomatic row with Mexico, plans to shake up trade across North America.
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Trump is vowing to rewrite the North American Free Trade Agreement — or pull out of it altogether. His efforts are injecting worrisome doubts about the future of business among the United States, Canada and Mexico.
Here's what's at stake:
WHAT IS NAFTA?
Negotiated by President George H.W. Bush and signed into law by President Bill Clinton, NAFTA took effect on Jan. 1, 1994. The trade pact eliminated tariffs — taxes on imports — and other trade barriers among the United States, Canada and Mexico. The impact on some vulnerable U.S. industries was delayed. Tariffs on textiles and clothing, for instance, were phased out only gradually. So were many trade barriers in the auto industry.
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Supporters said the agreement would promote trade and create jobs across a North American single market. It would be, in other words, a victory for everyone. Critics countered that low-wage competition from Mexico would wipe out American factory jobs. In 1992, U.S. presidential candidate Ross Perot famously predicted "a giant sucking sound" as American jobs migrated south across the border.
SO WHAT ACTUALLY DID HAPPEN?
Trade among NAFTA countries exploded. But so did America's trade deficit with Mexico.
In 1993, the year before NAFTA took effect, the United States had sold Mexico $41.6 billion in goods and bought $39.9 billion for a trade surplus of $1.7 billion. By 2015, the U.S. had exported $235.7 billion in goods to Mexico (a 467 percent increase) and imported $296.4 billion (up 643 percent). That created a trade deficit in goods of $60.7 billion.
It's a figure Trump has invoked to argue that naive American policymakers had been out-negotiated by their Mexican counterparts. But the trade gap has widened partly because American consumers are eager to buy relatively low-priced cars and other goods from Mexico.
NAFTA's impact on the economy was more modest than partisans on either side of the debate had expected. In part, that's because trade represents a surprisingly small portion of the U.S. economy — 28 percent in 2015, according to the World Bank, one of the lowest shares in the world. And trade with Mexico is a smaller still portion.
The Congressional Research Service has concluded that the impact of NAFTA on the US. economy "has been relatively small." The Peterson Institute for International Economics, a pro-free trade think tank in Washington, estimates that the U.S. loses about 203,000 jobs and gains 188,000 annually" on account of two-way trade with Mexico." That's a net loss of 15,000 jobs a year — a mere rounding error in a country with 145 million jobs.
WHAT DOES TRUMP WANT TO DO?
The president has vowed to negotiate a better NAFTA — or to walk away from the agreement if he can't get one. Adam Posen, president of the Peterson Institute, says he thinks the agreement should be updated to reflect, for instance, the rise of the internet businesses over the past 23 years ago. Trump hasn't spelled out how he wants to change the deal. But he clearly seeks to shrink the trade gap with Mexico by reducing imports, increasing exports or both. One likely target: U.S., Japanese and other automakers, which shipped more than $100 billion in autos and auto parts from Mexico to the United States in 2015.
After NAFTA, automakers began producing small cars in Mexico and shipping them across the border to the United States. Mexican auto workers still earn less than $10 an hour, allowing manufacturers to keep small car prices low — and affordable to U.S. families on a budget.
But U.S. and other companies have built complicated supply chains that span the U.S.-Mexico border. Pulling out of NAFTA would throw their operations into disarray. Although they build cars in Mexico, U.S. companies also do a big business ($30 billion worth in 2015) shipping auto parts to Mexico.
The nonprofit Center for Automotive Research estimates that the U.S. would lose at least 31,000 jobs if Trump went ahead with his threat to impose a 35 percent tax on Mexican auto imports.
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