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Trump renegotiation of North American Free Trade Agreement begins

August 16, 2017

 Donald Trump courtesy of flickr. Is he pleased with himself?

 

Donald Trump on NAFTA

 

On the campaign trail and in tweets candidate Donald Trump railed against the North American Free Trade Agreement, a pact among the United States and the two countries of North America - Canada and Mexico - with which it shares a border. As president, Trump continued his opposition to the pact, saying in an April interview with Associated Press, "I am very upset with NAFTA. I think NAFTA has been a catastrophic trade deal for the United States. It hurts us with Canada, and it hurts us with Mexico. Most people don’t even think of NAFTA in terms of Canada. You saw what happened yesterday in my statements, because if you look at the dairy farmers in Wisconsin and upstate New York, they are getting killed by NAFTA."

 

Then adding, "I am going to either renegotiate it or I am going to terminate it."

 

Negotiations with Canada and Mexico will open this week, August 16 - 20. Let's go over what NAFTA is, and what economists who have looked at it have concluded about what has happened under the agreement.

 

What is NAFTA

 

George H. W. Bush negotiated and signed the pact, but it didn't get ratified by  Congress before Bush left office. Bill Clinton closed the deal after negotiating some side pacts on labor and environmental concerns. Congress ratified the deal with more Republican than Democrat support, and Clinton signed the trade pact. It went into effect in January 1994.

 

Before NAFTA, the United States had a trade pact with Canada. NAFTA updated that pact and brought in Mexico. NAFTA gradually eliminated all tariffs among the three countries, about 50 percent of all product tariffs were eliminated fairly quickly upon the signing of the pact, remaining tariffs were reduced gradually over 10 to 15 years. Non trade barriers were reduced or eliminated.

 

The United States, Canada and Mexico are members of the World Trade Organization. If NAFTA were to be terminated, tariffs between the United States and Mexico revert to those that are allowed under the WTO rules, and U.S. exporters would face Canadian import tariffs of 4.2 percent and Mexican import tariffs of 7.5 percent.

 

What effect NAFTA had on the U.S.

 

In opening up NAFTA to renegotiation it is wise to understand the benefits that would be given up. This summary is a from the Wharton school of business at the University of Pennsylvania of what happened under NAFTA. Not all of this would be reversed if NAFTA were terminated, but the gains could be significantly reduced.

 

Overall trade between the three NAFTA partners — the U.S., Canada and Mexico — has increased sharply over the pact’s history, from roughly $290 billion in 1993 to more than $1.1 trillion in 2016.

 

U.S. investment in Mexico rose from $15 billion to more than $107.8 billion in 2014. This has significantly modernized the Mexican economy and reduced the pressure on Mexican immigration to the U.S. And of course U.S. investors benefit from the returns generated on this investment.

 

Six million U.S. jobs depend on U.S. trade with Mexico. An additional eight million depend on trade with Canada.

 

Twenty-five cents out of every dollar of goods that are imported from Canada to the U.S. is actually “Made in USA” content, as is 40 cents out of every dollar of goods imported into the U.S. from Mexico.

 

But the United States is a big country so overall NAFTA has had only a modest positive impact on U.S. total income. For example, according to a 2014 report by the Peterson Institute for International Economics, the United States is $127 billion richer each year that the pact has been in force, thanks to “extra” trade growth fostered by NAFTA.

 

Now $127 billion annually is nice, but the United States now produces $19 trillion of income per year. (It was smaller when the pact first went into affect,)  That $127 billion spread out over the U.S. population amounts to $400 per person per year, while U.S. income per person is about $50,000 per year.

 

Supporters of NAFTA estimate that the nearly 200,000 export-related jobs created annually by NAFTA pay an average salary of 15% to 20% more than the jobs that were lost. On the amount of job loss due to NAFTA, one estimate is a net loss of 15,000 jobs - job losses resulting from NAFTA  minus job gains. Another estimate by economist Robert Lawrence, professor of government at Harvard’s Kennedy School. who has studied the issue at length, is that at most something on the order of a net loss of 150,000 jobs in U.S. manufacturing in total were lost due to the trade agreement. He says in an economy that adds or loses that many jobs or more in a typical month that is a rounding error.

 

While the benefits from NAFTA are encouraging and would seem to make it wise to continue the pact updated in some form, it should be recognized that any change in trade patterns causes winners and losers. In total, the country gains from increased trade, but some of the benefits are in the form of reduced prices for consumers and are widespread and diffuse, and increased employment in export industries don't typically go to those who lose their jobs in industries that compete with imports.

 

Assistance for workers who lose their jobs

 

There is a federal government program - Trade Adjustment Assistance - that is supposed to aid workers who lose their jobs because of increased imports due to trade pacts, but it has never been generous enough and funded enough to truly fully compensate trade displaced workers. It's main benefit is to extend unemployment benefits for these workers for up to a year in some cases. What is really needed is generous severance grants to older trade impacted workers, effective retraining programs for the younger displaced workers and generous relocation grants to workers who can get jobs in expanding industries in communities where jobs are more plentiful. This could easily be paid for out a portion of the $127 billion annual gains in U.S. income that result from NAFTA.

 

Now if Trump would support a sufficiently expanded and fully funded trade adjustment assistance program for dislocated workers like that, it would truly be something to cheer.

 

References:

 

NAFTA’s Impact on the U.S. Economy: What Are the Facts? Wharton School

 

http://knowledge.wharton.upenn.edu/article/naftas-impact-u-s-economy-facts/

 

and http://www.businessinsider.com/did-nafta-cost-or-create-jobs-2017-3

 

What is NAFTA, and what would happen to U.S. trade without it? Washington Post

 

https://www.washingtonpost.com/news/monkey-cage/wp/2017/02/15/what-is-nafta-and-what-would-happen-to-u-s-trade-without-it/?utm_term=.9aba0e9f1151

 

The North American Free Trade Agreement (NAFTA)

 

http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=2939&context=key_workplace

 

NAFTA 20 YEARS LATER https://piie.com/sites/default/files/publications/briefings/piieb14-3.pdf

 

Associated Press Interview with Donald Trump

 

https://www.apnews.com/c810d7de280a47e88848b0ac74690c83

 

Here are all the terrible things President Trump has said about NAFTA — before deciding to stick with it

 

http://www.nydailynews.com/news/politics/terrible-president-trump-nafta-article-1.3107104

 

 

 

  

 

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