Trumping Trade: The Future of NAFTA

Photo: iStock.com/ronniechua

The North American Free Trade Agreement (NAFTA) has stitched the economies of Mexico, Canada, and the United States together since 1994. However, over those twenty-plus years, criticism and controversy have continuously dogged the free trade pact. To U.S. opponents of the deal, NAFTA represents the kind of rampant globalization that has helped enrich a feckless elite at the cost of hundreds of thousands of working class jobs. For decades, this deep resistance to NAFTA and deals of its kind has found a home on the political Left, with politicians like Senator Bernie Sanders (D-VT) arguing that the agreement has lost 850,000 American jobs (a widely disputed figure).

But, after the election of Donald Trump, opposition to free trade and NAFTA in particular has found a new, if unfamiliar, home in the Republican Party. During the campaign, Trump vilified NAFTA as “probably the worst trade deal…ever signed in the history of the world” and promised to “withdraw from NAFTA and start all over again” if he could not renegotiate the agreement to his liking. 

Today, as Trump picks his team and prepares to take office on January 20, will the President-elect follow through on his promise to renegotiate or scrap NAFTA, and if he does, what will become of relations between the United States and its two closest neighbors?

First, it is unclear how easy it would be for the U.S. to withdraw from NAFTA or even use that withdrawal as a credible threat. Article 2205 of the agreement states that any party may withdraw from NAFTA after giving six months’ notice, but the U.S. legal process for exiting foreign trade agreements is murky at best. As Chad P. Bown, former senior economist for international trade and investment at the White House Council of Economic Advisers, notes, “no one has ever done it before so we are not quite sure what the actual procedural steps would be.”

The U.S. has left other types of foreign treaties in the past, but the key question of whether the U.S. President can cancel a treaty on his own actually remains unanswered. President Jimmy Carter’s decision to withdraw from the Sino-American Mutual Defense Treaty with Taiwan in 1980 led to a lawsuit over the President’s right to annul treaties without Congressional consent. However, in the resulting Supreme Court case, Goldwater v. Carter, the Court decided not to rule on the issue because of the political nature of the case. Given this legal uncertainty, Trump would probably need a compliant Congress to effectively threaten withdrawal from NAFTA, and even then, he could face multiple lawsuits from the businesses and consumers that would inevitably be hurt by new tariffs.

This ambiguity lends credence to the theory that Trump and his team may not actually look to tear up the deal. As David Biette, Global Fellow at the Wilson Center’s Canada Institute, notes, “Trump’s wild declarations during the presidential campaign do not now seem to be the ultimate goal.” Instead, Biette guesses, the President-elect’s extreme campaign promises seem more designed – if indeed they were designed – to set a harsh negotiating position that will allow his administration to win new concessions from Canada and Mexico in an updated NAFTA.

Under this scenario, there is actually much that can be accomplished in new talks. According to most nonpartisan studies, NAFTA has proven an economic boon to the United States, increasing GDP growth by nearly 0.5 percent and creating roughly two hundred thousand jobs per year, which pay 15 to 20 percent more than the jobs lost. However, the pact is more than 20 years old, and there a number of areas that could be updated. According to William Krist, former Assistant U.S. Trade Representative for U.S. import & export policy, “NAFTA’s provisions on labor and environment are relatively weak” and could use a refresher. Similarly, reasonable new rules on state-owned enterprise (like Mexico’s Pemex), currency manipulation, and the uneven application of “value added” taxes (VAT) could address some of the complaints that Trump focused on during the campaign.

However, if renegotiation talks fall apart and Trump does decide to pursue withdrawal from NAFTA, the economic ramifications could be dire. Scrapping the deal would automatically lead all three countries to revert back to pre-NAFTA import tariff levels. Canada and the U.S. have a free trade agreement which predates NAFTA, so trade between the two countries could return to that agreement. But Mexico and the U.S. have no such agreement, and according to Bown, “in the absence of NAFTA, we would end up in an asymmetric relationship with Mexico, in which they impose even higher tariffs on imports coming from the United States (8 percent) than what we impose on them (3.5 percent).”

In that scenario, Trump might follow through with his campaign threat to impose a 35 percent tariff on Mexican imports, which could lead Mexico to sue the U.S. for breaching World Trade Organization (WTO) rules or simply retaliate in kind. In addition to starting this kind of trade war, annulling NAFTA would also deeply disrupt American, Mexican, and Canadian businesses, which have developed complex and interconnected supply chains over the past 20 years.

To dampen such fears, the Trump transition team has worked to walk back some of the campaign rhetoric in recent weeks. Earlier this month, Anthony Scaramucci, senior advisor to the President-elect’s transition team, told a group of business leaders that Trump isn’t “looking to rip up NAFTA” so much as “make it fairer.” If that is true, much can be gained from NAFTA’s renegotiation. If not, economic disruption and deeply strained relations are sure to follow. 

Fritz Lodge is an international producer at The Cipher Brief. Follow him on Twitter @FritzLodge.