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The Uncertain Future and Eminent Collapse of NAFTA

The North Atlantic Free Trade Agreement (NAFTA) is a treaty signed by two developed nations, United States and Canada, and an emerging market country, Mexico.

The agreement, which eliminated almost all tariffs on trade among the member countries came to effect on January 1, 1994. Like other trade pacts, the main purpose of NAFTA is to encourage economic activity among the three major economic powers in North America. By removing trade barriers, NAFTA increases the prospect of voluminous investment opportunities in the region. NAFTA is the world’s largest free trade agreement; the gross domestic product of its three members exceeds $20 trillion. Between 1994 and 2008, numerous tariffs especially those related to agriculture, textile and automobile were gradually scrapped.

The agreement was strategic, both economically and politically. Canada and Mexico are the United States’ second and third largest suppliers of imported goods, and almost one-fourth of all U.S imports suck as crude oil, machinery, gold, fresh produce, vehicles, livestock and processed foods come from Canada and Mexico. Also, about one-third of U.S exports such as machinery, vehicle parts, mineral fuel/oil and plastics are forwarded to Canada and Mexico.

When the Clinton administration signed the deal in 1993, it was expected that about 200,000 jobs would be created within two years and 1 million jobs within five years because of the role exports play to the U.S economy. President Clinton said the trade deal “means jobs. American jobs, and good-paying American jobs.” The administration also anticipated a surge in imports from Mexico under lower tariffs.

To prevent businesses from exploiting labour due to lower wages and lenient worker health and safety regulations in some member countries and the abuse of the environment as a result of looser environmental regulations, the bloc introduced two supplementary regulations: The North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labour Cooperation (NAALC). These agreements intended to halt the exploitation of labour and abuse of the environment among member countries by preventing businesses from relocating to countries with weak labour and environmental regulations. The agreement contains strict and deterrent penalties for businesses that violate member countries’ laws, custom procedures and regulations.

The impact of NAFTA on the economies of the three-member countries has raised heated debates among experts. Though it is a fact that all the signatory countries experienced economic growth, higher wages and increased trade since NAFTA’s implementation, there has not been any consensus among experts as to how much it actually contributed to these gains. NAFTA’s critics have always been those who worried about the relocation of U.S companies and jobs to Mexico, despite the supplementary NAALC. These arguments are hard to debunk as NAFTA truly affected, for example, many U.S auto workers in this way. The recent issues of drug trafficking, immigration, crimes and security at the US-Mexico border have also proven critics right. According to Recovery Village, most of the illicit drugs that get into the United States pass through the Southwestern border (the Mexican border), and that Mexico remains the number one supplier of marijuana and methamphetamine to the United States; and about 93 percent of cocaine headed to the U.S from South America pass through Mexico.

Now NAFTA is heading into its 25th year, but its future is in question. Following the inability of the Obama administration to deal with those pressing challenges, the new president, Trump, wants to change everything. It was his campaign promise to the many redundant American auto workers that he would renegotiate NAFTA for better terms for the United States. For him, this deal is “the worse trade deal maybe ever signed anywhere” and he is therefore ever ready to pull out if he can’t push the trilateral trade accord to the best interest of the U.S. He threatened that in his first 100 days in office, he would withdraw from NAFTA if Canada and NAFTA are unwilling to renegotiate. The two members are willing because the agreement is quite outdated since it doesn’t cover new emerging areas like internet commerce. To back his words with action, on January 23, 2017, President Trump signed an executive order to renegotiate NAFTA, and appointed U.S. Trade Representative Robert Lighthizer to appear for the United States.

His demands are rather far-fetched. First, the Trump administration seeks to reduce the trade deficit between the United States and Mexico. In 2016, Americans bought $55.6 billion more imports from Mexico than vice versa. To do this, the administration wants to remove unfair subsidies. The administration wants Mexico to cut its value-added tax on U.S companies and end the maquiladora programme. The maquiladora programme makes it easier for U.S companies to setup low-cost factories across the Mexican border to assemble finished products, and after that they again export the goods back to the U.S. This programme has increased Mexica’s export by 65 percent and employ about 30 percent of its workforce. That means an undercut in American workers and the exportation of jobs to Mexico. The VAT, on the other hand, acts as an unfair tax on U.S exports to Mexico. When companies export finished products to the United States, Mexico rebates the VAT tax; however, when U.S companies exports finished products to Mexico, they must pay the VAT tax. Trump sees this system as unfair as it encourages U.S companies to build their factories in Mexico to benefit from the rebate and escape the VAT tax.

The Trump administration also wants to ask for stronger protection for U.S. digital trade and intellectual properties. It also wants state-owned companies, such as Mexico’s Pemex, to start operating more like private corporations. But this company, undoubtedly, is a source of national pride, and its complete privatisation, even if it is possible, could raise strong public displeasure in Mexico. The administration also demands for the dissolution of NAFTA’s Dispute Resolution Panel. U.S Commerce Department accused Canadian lumber exporters of intentionally subsidising the price of their lumber exports to the United States. This practice allows them to dump low-cost lumber into the American market, which unfairly under-prices U.S companies and hurt their competitive edge. When the Commerce Department reported this to the Dispute Resolution Panel, it ruled in favour of Canada. Following that ruling, the Commerce Department threatened to impose a 20 percent tariff on Canadian lumber imports.

Other measures include making it easier for U.S. telecom companies and banks to operate in the other NAFTA countries. Similarly, the administration wants its trade partners to open up more of their government contracts to U.S. companies. At the same time, it wants to use “Buy American” provisions to limit their firms from winning U.S. government contracts. Also, on March 30, 2017, there was another NAFTA proposal that sought to allow “snapback” tariffs if a domestic industry was damaged by imports.

On its part, Mexico wants the United States to allow its trucks on U.S roads. This was promised in the first NAFTA agreement but was later withdrawn by the U.S. Congress. Mexico is also looking for anti-corruption clauses to the agreement. Canada also has its demands. Canada seeks the United States to end tariffs on its lumber and dairy products. It has also asked Boeing to drop its lawsuit against Bombardier. The U.S. Commerce Department imposed a 220 percent tariff on the imports of Bombardier C Series jets. This means that Airbus must have to fund Bombardier’s manufacturing plant in Alabama to skirt the tariff. This move will worsen Boeing’s competitive position against Airbus, its biggest competitor. Mexico and Canada both demand increased access for business travellers. They also ask for the inclusion of gender rights in the agreement.

As the debate on NAFTA keeps escalating, the sudden collapse of NAFTA under this Trump administration should not be surprising. From all indications, Mexico and Canada are willing to update the pact to incorporate so many areas, including labour and environmental regulations which are contained in the NAALC. But the problem will largely stem from Mr. Trump’s stiff position on making the U.S the overall winner in a “new” NAFTA. Many of the demands of the Trump administration are too exhaustive and dangerous for the other two members to bear. For example, it will be extremely difficult for Mexico to completely privatise the state-owned petroleum company, Pemex. Similarly, while the Trump administration forces the other two members to open up their government contracts to U.S companies, it intends limiting the other member countries’ companies’ access to U.S government contracts through the “Buy American” campaign.

But how would NAFTA fall or collapse? Simple. NAFTA will collapse if the United States withdraws. Even the agreement makes it so easy for member country to withdraw as it is spelt out in its article 2205: “A Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining parties.” If the United States withdraws from the pact, for example, it will be left with Mexico and Canada – a situation of a two-member economic bloc with a developed nation and an emerging market country. But there are other options for these two countries in the event that the U.S dumbs NAFTA. For example, they may decide to annex new members especially from South America. But considering the geographical location of Canada and Mexico and the other Southern American Countries, the prospect of a new economic that would embody Canada and other southern American countries is very slim. On the other hand, the bloc might survive if Mexico decides to leave. Already President Trump’s biggest concern is the unending trade deficit between Mexico and the U.S, as brought forth by NAFTA, and the migrant crisis at the Mexican border. The proponents of NAFTA thought that, by uniting the U.S and Mexican markets, such an agreement would lead to the gradual convergence of wages and living standards in the region. The then Mexican president, Carlos Salinas de Gortiari, confirmed this when he said his country “would export goods, not people.” But between 1990 – 2000 the number of Mexican immigrants more than doubled when it reached 9.2 million.

One of the underlining reasons for NAFTA’s inability to curb this immigrant surge is the peso crisis in the second half of the 1990s that plunged Mexican economy into a recession. Another arguable reason is that the reduction in the Mexican corn tariffs did not encourage Mexican corn farmers to engage in other, more lucrative crops, but it, instead, prompted them to give up farming. A different reason is that the Mexican government confined the effects of NAFTA only to the manufacturing sector in the northern part of the country; the government failed to undertake the promised infrastructure investments across the country. 

 Of late, the U.S trade deficit with Canada is so insignificant to bother Mr. Trump. This is because the deficit with Canada has seen a significant drop right after 2008 – from $78341.60 in 2008 to just $17583.20 in 2017. Besides, the U.S-Canada border does not serve as a gateway for undocumented migrants to flow into the United States, neither does the border witness crimes and other security concerns or drug trafficking. What if Canada sees Trump’s demands as unrealistic and exploitative and then decides to leave? In this case, NAFTA will collapse so easily. It is clear that the Trump administration is thoroughly obsessed with the renegotiation of NAFTA because they don’t understand how a developing country, like Mexico, should sign a free trade agreement with the United States when such a deal strictly puts the American market, roads, borders and security at risk. While Mexico is now demanding an unhindered access of U.S roads to its trucks, Trump is warming up to build his wall to protect the Southwestern border from Mexican immigrants, business travellers and trucks.

But the collapse of NAFTA will not go without consequences for all the signatory countries. Clearly, trade among them will dwindle as each country will revert back to its former trade modalities. For example, in the short-run, tariffs would benefit U.S. oil companies by raising prices on imported Mexican oil. They would also benefit U.S. farmers. They might restore the 500,000 – 750,000 manufacturing jobs lost in California, New York, Michigan and Texas. On the other hand, tariffs would raise the price of imports for American consumers. Inflation would increase as a result. Exports to both Mexico and Canada would decrease. Mexico would revert to the high tariffs it had before NAFTA. Mexico is the top export destination for U.S.-grown beef, rice, soybean meal, corn sweeteners, apples and beans. It is the second-largest export destination for corn, soybeans and oils. Similarly, 80 percent of Mexico’s exports go to the United States. U.S. tariffs on these exports would be very damaging to Mexico’s economy. 

By 2015, NAFTA had quadrupled trade by $1.5 trillion. It also contributed at least 0.5 percent to U.S growth each year, which created about five million new jobs. Canada and Mexico invested $240.2 billion in the United States, while U.S. companies invested $452 billion in those countries. The United States imports $294.7 billion from Mexico – that’s almost the same as its imports value from China. Thus, any trade distortion would threaten the flow and price of these imports. They include oil, manufactured products, fruits, vegetables, coffee and cotton. 

NAFTA isn’t that all bad. It has got three significant advantages: The U.S grocery prices would be extremely higher without a duty-free import from Mexico. Secondly, the U.S has lower gas prices due to the oil imports from Mexico and Canada. This oil import has prevented gas prices from rising in the United States. NAFTA has also helped in increasing trade and economic growth in all the three countries.

The arguments, conceptions and misconceptions of NAFTA put its future in a dire uncertainty. No one is sure of what happens next; will NAFTA survive Trump? In the event that Mexico and Canada reject Trump’s sweeping demands, there is one thing we will be sure of – the end of NAFTA. But we all know that it will be extremely difficult for them to accept all his demands. For instance, Canada will be unwilling to increase the prices of its lumber exports to the United States. Mexico and Canada might not also accept the dissolution of NAFTA’s Dispute Resolution Panel. Since the renegotiations commenced, there have not been any considerable consensus on any issue. The uncertainty keeps deepening. These and many other issues are what cloud the future of NAFTA so far as the Trump administration is concerned.

Another thing we are sure of is that NAFTA has been beneficial to the North American economies and the average citizen. It has also, to some degree, harmed many infant industries. While it is understandable that each country should and must pursue its economic interest in all instances, it is equally important that each country presents reasonable demands and be willing to compromise if the need be. For NAFTA to survive Trump, all parties must be willing to sit on the table, debate, discuss, renegotiate and “remarry”.

By: Ovidiu Stanica

 

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