President Donald Trump’s determination to upend the accords that frame American trade policy are taking root. Even before Trump spiked the Trans–Pacific Partnership on Monday, the White House had signaled that the new president would renegotiate the North American Free Trade Agreement, “the worst trade deal in the history of this country,” as Trump called it on the campaign trail last year.
If that’s debatable, so is the prospect that, managed badly, this could produce the worst outcome on the trade side since the Smoot–Hawley Tariff helped turn a recession into a depression in 1930.
NAFTA, implemented in stages from 1994 to 1998, is a three-sided accord opening America’s borders with Mexico and Canada, and there’s no question it fundamentally reshaped economic ties across the board.
While Canada’s a major trading partner, the U.S. merchandise deficit was a very modest $15 billion in 2015. (Add in services, and the U.S. ran a surplus.) At this point Prime Minister Justin Trudeau is ducking for cover; he has already indicated that he’s willing to supersede NAFTA with a bilateral accord if that’s what things come to.
Mexico’s the pebble in Trump’s shoe, as he has long made plain. They run an annual merchandise surplus with the U.S. of almost $60 billion; when an American plant pulls up stakes in the Midwest, it’s almost always to set up south of the border.
More saliently, in my view, NAFTA has put Americans in unfair competition with workers in a completely different economic context. Having thus disarmed Americans at the bargaining table, NAFTA is effectively complicit in the wage stagnation and worsening income inequality evident over the last couple of decades.
But Trump betrays two potentially fatal problems, both symptoms of his profound lack of sophistication in diplomacy and international economics.
One, by signing an executive order Wednesday to begin his border wall, just as President Enrique Peña Nieto was about to begin a state visit, Trump just repeated the same mistake he recently made with the Chinese. The wall is to U.S.–Mexican ties as Taiwan or the South China Sea are to Sino–U.S. ties.
Mixing touchy politics, sovereignty, and national pride with economic and commercial problems is a mistake almost by definition. As a result, Peña Nieto, under intense political pressure at home, canceled his visit Thursday morning and is talking a much tougher game on NAFTA, immigration, and other such issues.
Two, and again as with China, Trump entertains a grossly simplistic notion of NAFTA’s mechanics, its plusses and minuses, and the prospect of reshaping it to better U.S. advantage.
- Trump has said little about what he wants to emerge from a renegotiated NAFTA, but his proposed 20 percent tariff on imports from Mexico will be met with countervailing duties on imports from the U.S.
That’s called a trade war.
- Trump doesn’t seem to understand even the rudiments of supply-chain manufacturing structures and related production practices. Products “made” in Mexico may have components made in U.S. factories and shipped across the border. And vice-versa. What will happen if supply chains are disrupted? In all likelihood, U.S. companies will resort to another low-wage producer with whom the White House isn’t picking a fight.
- Trump’s not taking the lesson he should have when Carrier consented not to shift some factory production to Mexico after Trump’s election victory. Increasing U.S. manufacturing production does not equal increases in American jobs—not any longer. Many jobs that Carrier won’t send to Mexico will be automated in Indiana. Trump may revive U.S. manufacturing to one or another degree—or oversee the trend, anyway—but the big winners will be production-floor robots.
Although trade among the NAFTA signatories has tripled, the agreement has had a surprisingly modest impact on GDP growth. On balance, there is too little in it to protect workers, towns, and cities from the negative fallout that was perfectly predictable.
But 23 years later, it’s hard to see how Trump can do much more than ameliorate a few of the negative consequences unless he wants to risk a trade war or some other unimaginable mess.