Trump and Trade: NAFTA
Trump has been particularly vocal about his commitment to revoke NAFTA on the grounds that it has led to jobs losses in the US, as labor is increasingly outsourced to cheaper countries like Mexico. Signed by President Clinton in 1994, NAFTA (North American Free Trade Agreement) was an agreement between Canada, Mexico and the United States, to remove all internal trade barriers and thus boost imports within the North American Region. 25% of all US imports would be supplied by Mexico or Canada, while 30% of US exports were slated for Mexico and Canada. President Clinton believed that the exports would push economic growth—envisioning one million new US jobs within 5 years. It was this promise to bolster the American dream that would later lead President Clinton to win the presidential elections.
NAFTA’s aims were:
1) Fostering a conducive environment for fair competition in the free trade region
2) Amplifying the investment prospects between those countries
3) Enforcement and protection of intellectual property rights
4) Prepare guidelines
5) Form a framework for multilateral cooperation to magnify the benefits of the agreement.
6) Remove all trade barriers to promote the movement of goods and services between countries.
NAFTA fulfilled them all, and investments in all 3 countries increase exponentially, creating the largest free trade zone in terms of GDP. At its height, trade even tripled when tariffs were eliminated or lowered.
NAFTA impact on the economy
Despite the success of NAFTA which brought in a whopping one trillion dollars in trade benefits to the US, Canada and Mexico, there is still widespread debate on the usefulness of the treaty.
Foreign investors are also protected from the government negatively impacting their businesses. The US council on foreign relations stated that the NAFTA agreement has only increase US GDP by a minimal percentage.
- Many critics (including former president Obama) blamed NAFTA for taking away US jobs—outsourced to Mexico with lower labor costs. CNN estimates a staggering 27% decrease in manufacturing jobs (3.4 million from 1994-2017).
- Obama proposed the Trans-Pacific Partnership agreement instead—which never entered into force as Trump would later decide to withdraw the US from TPP shortly after his electoral win. Trump expressed his ‘America-first’ concerns, showing more interest in entering ‘fair, bilateral trade deals’ aimed at bringing new jobs and promoting the U.S. economy.
- Jeffrey Schott, senior fellow at the Peterson Institute said, “I don’t think there’s many ways to amend the original trade agreement to expand US production and jobs, because tighter rules would only lead to higher production costs and have adverse effects on US competitiveness.”
Differences between the new and old: USMCA vs NAFTA
- Big changes for cars.
- 2020 onwards, zero US tariffs will be given on automobiles with 75% of a their components manufactured in North America (a leap from the 62.5% under NAFTA).
- A significant percentage of automobile manufacturing jobs will be alloted to minimum wage workers, with a minimum of $16 per hour— 3 times more than Mexico’s. The planned increase in this percentage is an optimistic 30% by 2020, and 40% by 2023.
- Though benefitting automobile workers, the cut-throat cost could lead to higher car prices and kill off small manufacturers. Automakers would likely look to manufacture cheaper elsewhere in Asia, and export to other high demand countries like China.
- Trump’s victory: Canada opens up its milk market to U.S. farmers.
- Previously, the Canadian government kept prices high by tightly regulating local dairy production and foreign dairy imports.
- Canada is now surrendering a greater proportion of market share towards the US by cancelling its pricing scheme for class 7 dairy products. Now, US producers can send more milk protein concentrate, skim milk powder and infant formula to Canada.
- Canada’s victory: Chapter 19, allowing for a special dispute process, stays intact.
- In this new trade deal, Canada retains the rights to Chapter 19 which the US have tried to abolish.
- Chapter 19 allows all North American countries to challenge other countries countervailing and anti-dumping duties in front of a selected panel of representative from each country. Canada uses this chapter to challenge the US on its softwood lumber restrictions.
- Mexico and Canada get assurance that Trump won’t pound them with auto tariffs.
- Despite Trump’s threats to impose new tariffs on vehicle imports, side letters signed by his administration has allowed Canada and Mexico to evade them. Regardless of ANY future tariffs imposed.
- Improved labor and environmental rights.
- The USMCA raised the labor quality standard for Mexican workers entering the US by ensuring that they comply to the higher safety regulations and retain their right to form and organize unions.
- Increased intellectual property protections.
- More protection for domain names, financial services and biotech. Many legal experts and business leaders welcomed this change considering the previous agreement was arranged 25 years ago.
- Big drug companies gain more footing in Canada.
- US pharmaceutical companies are granted 10 years to sell its products in Canada before facing the treat of generic competition.
- Deal must be reviewed after 6 years.
- If all countries are satisfied after 6 years, the deal will extend another 16 years, and then reviewed and extended every 16 years.
In spite of Trump’s bold and at times, seemingless reckless statements, his administration still managed to strike a favorable deal; whilst Mexico and Canada have stood firm in ensuring that their demands be taken into account. In my opinion, Trump’s new trade agreement does not seem to be strikingly different from his previous trade deal. It is practical and has benefited all parties.
- Jen Kirby, Feb 5, 2019, 10:17pm, USMCA, Trump’s new NAFTA deal, explained in 500 words, Retrieved from: https://www.vox.com/2018/10/3/17930092/usmca-nafta-trump-trade-deal-explained
- KIMBERLY AMADEO, April 29, 2019, Trump’s NAFTA Changes The USMCA Would Create U.S. Jobs and Raise Auto Prices
- Office of the united states trade representative, United States-Mexico-Canada Agreement, Retrieved from: https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement
KIMBERLY AMADEO Updated January 23, 2019, Six Problems With NAFTA, Retrieved from: https://www.thebalance.com/disadvantages-of-nafta-3306273
Writers: Bryan, Yash
Editor: Vikky Beh