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Replacing the North American Free Trade Agreement (NAFTA) with The…
Replacing the North American Free Trade Agreement (NAFTA) with The United States – Canada – Mexico Agreement
In his 2016 presidential campaign, Donald Trump repeatedly criticized the North American Free Trade Agreement (NAFTA) as an unfair deal in which Americans had been taken to the cleaners by Mexico. Trump claimed that NAFTA had cost American manufacturers millions of jobs, even though there is little evidence to suggest this is the case. After becoming president, Trump stuck to his word and initiated a renegotiation of NAFTA.
Trump’s anti-NAFTA stance sent shockwaves through industry on both sides of the border. Since NAFTA was signed in 1994, trade between the United States, Canada, and Mexico has tripled to $1.3 trillion. In 2017, the United States exported $342 billion of goods and services to Canada, and $277 billion to Mexico, while importing $339 billion from Canada and $355 billion from Mexico. The U.S. ran a $2.8 billion surplus in trade with Canada, and a $69 billion deficit with Mexico. Canada and Mexico are now the largest export markets for the United States, accounting for a third of all U.S. exports, and the largest sources of imports behind China.
The renegotiation of NAFTA was complicated by the fact that multilayered supply chains now span both sides of the U.S.-Mexico border. Nowhere is this more true than in the automobile industry. Auto parts manufactured in the United States may be shipped to plants in Mexico, where finished cars are assembled and then shipped back to the United States for final sale (the converse also occurs, with parts manufactured in Mexico being shipped to U.S. final assembly plants). In 2017, U.S. producers exported $21 billion of finished automobiles and automotive parts to Mexico, but imported $84 billion in autos and parts from Mexico. Without that $63 billion trade deficit in autos and auto parts, the United States would be running only a $6 billion trade deficit with Mexico.
Perhaps because he recognized the lopsided nature of trade in auto and auto parts between the United States and Mexico, President Trump took it upon himself to criticize auto producers that have moved production to Mexico or are planning to do so. Following criticism from Trump, Ford canceled plans to build a $1.6 billion auto assembly plant in Mexico. President Trump also criticized General Motors, Toyota, and BMW for their plans to invest in Mexican assembly operations. Jawboning aside, as part of the NAFTA renegotiations, the Trump administration looked into different options for restructuring trade with Mexico. These included placing tariffs on imports of autos from Mexico.
In the end, on September 30, 2018, the Trump administration reached an agreement with Mexico and Canada on a revised version of NAFTA. Known as the United States-Mexico-Canada Agreement, or USMCA for short, this agreement was ratified by legislators in all three countries. The USMCA made some changes to the 25-year-old NAFTA agreement. Most significantly, NAFTA required automakers to produce 62.5 percent of a vehicle’s content in North America to qualify for zero tariffs. The USMCA raised that threshold to 75 percent. That’s meant to force automakers to source fewer parts for a car assembled in North America from Germany, Japan, South Korea, or China. The new agreement also mandates that, by 2023, 40 percent of parts for any tariff-free vehicle must come from a so-called “high wage” factory. Those factories must pay a minimum of $16 an hour in average salaries for production workers, which is about triple the average wage in a Mexican factory right now.
On July 1, 2020, the USMCA was signed and is viewed by many as a mutually beneficial win for North American workers, farmers, ranchers, and businesses. Critics, however, note that the consequences may include higher costs to North American automobile producers, and higher prices for consumers.
Sources: U.S. Census Bureau, www.census.gov/foreign-trade/index.html, accessed April 10, 2018; Robbie Whelan, “Gloom Descends on Mexico’s NAFTA Capital,” The Wall Street Journal, January 26, 2017; Dudley Althaus and Christina Rogers, “Donald Trump’s NAFTA Plan Would Confront Globalized Auto Industry,” The Wall Street Journal, November 10, 2016; William Mauldin and David Luhnow, “Donald Trump Posed to Pressure Mexico on Trade,” The Wall Street Journal, November 21, 2016; and Siobhan Hughes et al., “Trump Tariffs Spark GOP Rift,” The Wall Street Journal, March 5, 2018.
Case Study Questions:
1) Do you think that NAFTA has been a net positive or negative for the United States economy?
-What about for the economies of Mexico and Canada?
2) Why do you think Donald Trump was so focused on renegotiating NAFTA during and after his successful presidential campaign?
-Justify your claims using credible sources.
3) What is your assessment of the USMCA?
-What are the potential benefits of this agreement for the United States? What are the costs?
-Does this agreement represent an improvement over NAFTA?
4) On balance, is the USMCA good for Canada and Mexico? Why or why not.
-Justify your claims using credible sources.
