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Update Nafta, Don't Destroy It

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Update Nafta, Don't Destroy It

February 14, 2018

President Trump’s position on Nafta has been clear: the United States must renegotiate the “disaster” of a trade deal or continue to lose jobs as a result of imbalanced trade. The president was outspoken about his concerns over “unfair” trade agreements during his recent State of the Union Address.  His stance has seemingly unified some lawmakers in the defense of Nafta, especially in high-export states such as Texas.

The trade deficit has come under intense scrutiny by the Trump Administration. During the president’s first year in office, the trade deficit reached $566 billion, the highest in nine years. The two countries that account for the majority of our deficit are China and Mexico, with trade deficits of $375 billion and $71 billion respectively. While the president has openly sung the praises of the economy and celebrated the success of the newly-passed tax reforms, the inability to narrow the trade deficit is a point of frustration.

That frustration has fallen on the shoulders of both U.S. Trade Representative Robert Lighthizer and chief Nafta Negotiator John Melle. With each subsequent round of negotiations, Lighthizer’s tone has grown somewhat more exasperated towards both Canada and Mexico, with whom he claimed he was “surprised and disappointed.”

Prospects of the United States staying in Nafta will grow bleaker if the President and the Trade Representative continue to focus so heavily on only the trade imbalance. Despite Lighthizer’s claims that the recently revised renegotiation objectives, published by USTR, will “modernize and rebalance” the state of trade in the United States, the continued and irrational fixation on the trade deficit is only hindering discussions of how to improve Nafta’s future. A lack of progress means the United States is unwilling to move past the liberalization of trade in North America and the associated benefits may very well be over.

Nafta is now over twenty years old. Mexico, Canada, and the United States could all benefit from an updated version of the agreement. Clauses focused on facilitating energy trade, protecting intellectual property rights, and incorporating the digital economy would benefit all parties substantially. Unfortunately, the “Do No Harm” approach to negotiating a revised trade agreement that so many industry and policy leaders favor is not what the current administration seems to be pursuing. Ignorance of the valuable aspects of Nafta has significantly strengthened the calls to withdraw from the current agreement and to increase protectionism across most major industries.

Opponents of Nafta argue that industries in Mexico and Canada outcompete U.S. firms with lower-cost products that American consumers choose over their domestic counterparts. However, this argument completely discounts how interconnected is the global economy. Foreign firms, including those in Canada and Mexico, play a significant role in helping U.S. manufacturers purchase intermediate goods. Manufacturers use these cheaper goods in the production of their final products, lowering the operating cost of the firm. Lower operating costs are reflected in lower consumer costs for products utilizing intermediate goods, including products such as cars, cell-phones, televisions, laptops, and ovens.

Nafta has also benefited the U.S. workforce. Despite the trade deficit, Canada and Mexico are still the two largest export destinations for our goods, which mainly consist of vehicles, machinery, and electrical machinery. This means Nafta has directly supported the expansion of the U.S. manufacturing industry, the same industry that the current administration believes is placed most at risk by the current version of the agreement.

Jobs created by Nafta do more than just help sustain our manufacturing sector. The International Trade Administration estimates that in 2016 “exports of goods and services” supported 10.7 million U.S. jobs in this country. A full withdrawal from Nafta would mean that millions of workers, many of whom may not even know their job depends on free trade, could lose their jobs. This is the opposite effect predicted by the administration.

In addition to helping industry expansion, consumers benefit from lower costs. Without tariffs, prices of imported goods are lower. Often that benefit remains hidden from consumers who never think about the embedded savings from free trade. Consumers have an especially large benefit in the agricultural industry; where they have access lower-cost corn, beef, pork, dairy, and soybeans. Trade also presents the ability to buy agricultural products, such as berries, outside the North American growing season. Before Nafta, out-of-season fresh fruits and vegetables were more expensive.

Free trade has countless benefits to all the nations involved; the results of comparative advantage can be felt in consumers’ wallets, in companies’ bottom lines, and in U.S. GDP. Nafta has helped expand the economies of all three nations. Foreign direct investment has swelled, industries have expanded, quality has risen, and prices have dropped.

As we approach the seventh round of negotiations, we have to be honest about the significance of Nafta’s role in developing the economies of North America. Nafta has room for improvement in the current agreement: updates that focus on the innovation we have experienced over the past twenty years would help strength each nation’s economy. However, a truly modernized agreement should preserve the mutually beneficial relationships that created Nafta in the first place.

Jacob Reyes is a contributor to Economics 21 

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