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Economic Insights

Here’s a closer look at the trilateral trade deal as the United States, Canada, and Mexico enter renegotiations.

It was an historic pact that was going to provide "good-paying American jobs,” in the words of President Bill Clinton, while lowering barriers to commerce among the three neighboring nations of North America. The North American Free Trade Agreement (NAFTA), which was implemented in 1994, removed tariffs on products traded among the United States, Canada, and Mexico, while attempting to bolster investments among its member countries.

After 23 years, however, NAFTA may be faced with an overhaul. In August 2017, the Trump administration and the Office of the United States Trade Representative (USTR) opened NAFTA for renegotiation and threatened to withdraw from the agreement if “a better deal” for U.S. companies and U.S. workers was not reached.

Pros and Cons
In its original form, NAFTA focused heavily on loosening restrictions of trade in the agriculture, textiles, and automobile manufacturing sectors. The agreement significantly changed the landscape of North American economic and intergovernmental relations. After its signing, the developed economies of Canada and the United States were intimately integrated with Mexico’s developing economy. According to the Council on Foreign Relations, trade among the signatories more than tripled between 1993 and 2015.

The United States believed the agreement would bolster economic growth in Mexico, leading to more jobs and opportunities for the people of that nation, which would, subsequently, curtail illegal immigration to the United States. For the developed economies of Canada and the United States, the hope was that tapping an unsaturated market for exports would increase the competitiveness of their respective domestic businesses. Before the agreement was finalized, economists and U.S. presidents (former and current), from both political parties, predicted growing trade surpluses with Mexico and the creation per year of hundreds of thousands of new U.S. jobs per year.

Today, however, opponents of the agreement believe NAFTA has had the opposite effect. The Economic Policy Institute, for example, claims that 682,900 U.S. jobs were displaced by 2010. The Trump administration believes Mexico benefited from NAFTA, while U.S. factory workers were subjected to lower wages and fewer opportunities, as manufacturing shifted to Mexico and the U.S. trade deficit with its southern neighbor widened. According to the USTR, in 2016, the United States had a goods trade deficit with Mexico totaling $63.2 billion, compared to a more than $1.5 billion trade surplus in 1993.

However, proponents of NAFTA point to the trade deal’s positive effects on the U.S. economy. According to a study by the Peterson Institute for International Economics, for example, approximately 14 million U.S. jobs rely on trade with Canada and Mexico and nearly 200,000 export-related jobs are created annually. These positions pay 15–20% more than the jobs that were lost, according to the study.

Even still, it is difficult to separate the agreement’s direct effects on trade, economic growth, and job displacement. It’s worth noting, though, that during the period that NAFTA has been in effect, there have been rapid improvements in technology, expanded trade with other countries, including China, and various unrelated domestic developments in each of the three member countries that have had significant impacts on their respective economies.

Further, Canada has seen strong gains in cross-border investment activity since NAFTA was put into force. One of the biggest effects of NAFTA’s implementation has been the increase of U.S.–Canada agricultural flows. Canadian agricultural trade with the United States has more than tripled since 1994.

Changing the Terms
The top priority for U.S. president Donald Trump, as it relates to the trade deal, is to increase American employment and boost exports. To that end, the United States will prepare to discuss changes to the “rules of origin,” which are regulations governing the provenance of products covered under the agreement. NAFTA’s current rules of origin require, for example, that cars sold in any of the three member countries have 62.5% of parts sourced from the United States, Mexico, or Canada. The USTR will push for an increase in the number of parts sourced and the number of jobs created in the United States.

Another strategy the USTR will consider is leveling the playing field with Mexico by imposing stricter labor and environmental standards and making sure workers are paid more.

On July 17, 2017, United States Trade representative Robert Lighthizer released a summary of objectives for the United States in NAFTA negotiations: “We all agree that NAFTA needs updating. This is a 23-year-old agreement, and our economies are very different than [what] they were in the 1990s. We need to modernize or create provisions which protect digital trade and services trade, e-commerce, update customs procedures, protect intellectual property, improve energy provisions, enhance transparency rules, and promote science-based agricultural trade.”

It is worth noting that the current administration has been skeptical toward trade deals in general. Although in February 2016 President Barack Obama signed the Trans-Pacific Partnership, a trade deal involving the United States and 11 other countries, President Trump rejected, and withdrew from, the deal earlier this year. This action, coupled with the reopening of NAFTA negotiations, indicates the administration’s desire to reconsider long-standing efforts to  integrate global economies through multilateral trade agreements.

Shifting Trade Winds
However, this risk of a disruption in global trade may be mitigated by focusing the current negotiations on a modernization effort of NAFTA in order to promote more effective economic integration, competitiveness, and prosperity for the United States, Mexico, and Canada. The United States, during the past two decades, underwent a momentous shift as its economy shifted from being manufacturing-based to one service-based. Mexico likely will experience a similar transition in the coming years.

Any new proposal must, then, consider the rapid emergence of technology and the effects it may have on a country and region. Indeed, given the continued evolution of the global economy, the NAFTA renegotiation faces a tricky task: reconfiguring the trade pact while preserving the mutual economic, social, and political benefits envisioned nearly a quarter-century ago.

Reported by John George, Lord Abbett Product Consultant

 

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