What If NAFTA Goes Away?

What If NAFTA Goes Away?
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Bullet points are acceptable as long as they are accompanied by a relevant explanation.

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Case Discussion Questions

1. Because the three NAFTA member countries had been trading for ages before NAFTA, what are the benefits of an FTA such as NAFTA?

2. ON ETHICS: Pick your role as (1) a consumer, (2) a manufacturing worker, or (3) a banker in one member country. What has NAFTA done to help or hurt you and your community?

3. Pick a firm from your state or country that is active in at
least two (preferably three) member countries via trade and investment. How does it prepare for the scenario that NAFTA benefits are curtailed?

Case studyWhat If NAFTA Goes Away?

In effect since 1994, the
North American Free Trade Agreement (NAFTA) has no shortage of controversies. As Trump has assumed power, the criticisms against NAFTA, potentially culminating in its repeal, force us to entertain a previously unthinkable scenario: What happens if NAFTA goes away? The answer to this question obviously boils down to what NAFTA has brought to the United States.

In two decades, trilateral merchandise trade among three member countries grew from $290 billion in 1993 to $1.1 trillion in 2016—a nearly fourfold increase. Approximately $3 billion goods and services cross the border every day—an astonishing $2 million every minute. US trade with Canada tripled and US trade with Mexico increased by five times—while US trade
with the rest of the world grew 280%. Canada and Mexico are, respectively, the second and third largest exporters to the United States (China is the first). Canada and Mexico are, respectively, the first and second largest importers of US goods. Mexico alone imports more US goods than China, and absorbs more US imports than Britain, France, and Germany combined. Canada imports even more “Made in USA” goods.

What about jobs? In brief, no “giant sucking sound” has been heard. Approximately 300,000 US jobs—an average
of 15,000 per year—were lost due to NAFTA in its first two decades, but about 100,000 jobs were added. The net loss was small, as the US economy generated at least 25 million new jobs during the same period. In 2015, the Congressional Research Service acknowledged some worker and firm adjustment costs brought by NAFTA. But overall, it reported conclusively that “NAFTA did not cause the huge job losses feared by the critics.” At present some eight million US jobs depend on trade with Canada and another six million on trade with Mexico. Even for every job lost, the economy gains $450,000 in the form of higher productivity and lower consumer prices, which benefit all.

But a hard count on jobs misses another subtle but important benefit. NAFTA has allowed US firms to preserve more US jobs, because 40% of the value of US imports from Mexico and 25% from Canada is actually made in USA—in comparison, only 10% of the value of US imports from
China is made in USA. In 1994, US imports from Mexico only contained 5% of the value made in USA. Clearly NAFTA has facilitated seamless supply chain integration, with goods, components, and parts crossing the border multiple times
to be eventually assembled in one member country. Without NAFTA, entire industries may be lost rather than just the labor- intensive portions.

So what if NAFTA goes away? First, relax: not all the benefits discussed above will be lost. As an institutional framework, NAFTA merely represents some relatively new rules of the game that are man-made and artificial. Given their natural geographic proximity and historical links, the three North American neighbors had been trading for ages before 1994. Their tightly knit economies cannot and will not immediately stop trading.

In a hypothetical post-NAFTA era, these three economies will still gain by trading, but the gains will be smaller. Americans
and Canadians can still enjoy plenty of yummy avocados from Mexico (the world’s top avocado producer), but they will have to cough up more money for their beloved guacamole.

Second, if the Trump administration unilaterally imposes high import tariffs, Canada and Mexico will certainly respond in kind. Given the reality of NAFTA supply chain, a tariff is like erecting a wall in the middle of a factory. Hard-fought export market share in Canada and Mexico will shrink. Thousands
of jobs in manufacturing, logistics, and other services will disappear. For example, the Center for Automotive Research estimated that a 35% tariff on vehicles imported from Mexico, which would contain 40% “Made in USA” parts, would result in the loss of 31,000 US jobs.

Third, because both Canada and Mexico have free trade agreements (FTAs) with the EU, the US withdrawal from NAFTA will significantly help increase EU firms’ market share there.
In other words, EU firms, propelled by their own FTAs with Canada and Mexico, will be delighted to take over the market share vacated by US firms. Beyond those from the EU, strong competitors from China, Japan, and Korea, despite having no help from FTAs, will be elbowing their way into Canada and Mexico. In other words, reducing the preferential treatments (especially low or zero tariffs) enjoyed by US firms under NAFTA will clip their wings in the competition for export markets in Canada and Mexico. Ironically, gutting NAFTA will help enhance the competitiveness of America’s global rivals.

Finally, shutting down NAFTA does not bring back a large number of manufacturing jobs to the United States. The recent crises facing US manufacturing jobs, falling from 17 million
to 11 million between 2000 and 2010, have little to do with NAFTA. Instead, competition with China and technological changes have largely contributed to such a decline. Therefore, blaming Mexico and dismantling a beneficial FTA do not solve the problems associated with manufacturing job losses.

There is widespread belief that Trump’s nasty rhetoric on NAFTA is just “talk.” Procedurally, Trump is required to seek congressional approval if he merely wants to renegotiate NAFTA. Congress is unlikely to support a policy to throw away so many benefits and to spark retaliatory trade sanctions in America’s top two export markets—with so little gains. While NAFTA is not a panacea and has its problems, dismantling it would be “lunacy,” according to Texas Monthly. In summary, NAFTA is unlikely to be gone completely. But renegotiation is certainly possible.

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