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NAFTA: The Trade Agreement Briefly Assessed

By Claire Brisson

Claire Brisson is an undergraduate student majoring in accounting at the Eli Broad School of Business at Michigan State University

Since coming into effect twenty-three years ago, the North American Free-Trade Agreement (NAFTA) has paved the way for easy flow of goods and services between the three signatories to the deal: the United States of America, Mexico, and Canada.

Ask an average citizen in Canada (I-shares: EWC) or Mexico (I-shares: EWW) about the impact of free trade, and most would look at it favorably leading to greater opportunities and steady growth of their home economies.

US President Trump said that he would scrap NAFTA and other trade agreements that were not benefiting the US.  His argument is strengthened by the current trade deficit of $59 trillion dollars between the US and Mexico and the perceived loss of American jobs due to Mexican workers. Canada and Mexico have not pushed for a NAFTA replacement.

When the NAFTA deal was initially negotiated, many Canadians felt that the then Prime Minister Brian Mulroney and his Conservative government were selling out to the Americans and that their country was on its way to becoming the 51st US state. Those fears never materialized, and subsequently, Canada has benefited as much as Mexico from NAFTA.

The American president’s threat to end NAFTA has been a posture to level the playing field and negotiations have begun to revamp the free trade agreement between the three countries. Each party has goals and provisions that they hope to incorporate into the new deal.

The main goal of the US is to reduce the trade deficit, so that it isn’t importing too much more than its exports. Mexico’s main goal is to make sure that the US doesn’t try to throw tariffs on its products, or make it easier to do so in the future.

Canada’s main goal is exactly like Mexico’s. They want to ensure that the US will not add tariffs onto the goods that they have been trading freely for decades. The US does not have a significant trade deficit with Canada but wants to end its trade deficit with Mexico.

Mexico wants to secure the jobs for its citizens that have flourished under NAFTA into the future. Both Canada and the US want to see better wages and conditions for Mexican laborers which would ensure that Canadian and American corporations would reconsider before moving addition jobs to Mexico particularly in the automotive and electronics sectors.

Clearly, Mexico is playing defense in these negotiations fueled by President Trump’s campaign rhetoric to build a wall along the border between the two countries. Mexican President Enrique Pena Nieto and his government are concerned that the US will impose tariffs on the products that they export to the US and the upcoming presidential election in Mexico has added pressure to get an agreement in place quickly.

Although it may seem to be the underdog, Mexico does have considerable leverage in these talks as the second largest international market for American goods and industries. The large and growing Hispanic population in the US with strong ties to Mexico cannot be discounted as a political and economic force that also must be reckoned with. Also, Mexico can build relationships with Latin America and Europe which have growing economies to offset any negative effect a new agreement with the United States and Canada might bring.

Canada is in a similar position in not wanting tariffs on goods exported into the US that would have a negative impact on softwood lumber and in the energy sector. Canada is America’s largest trading partner and the slight trade deficit that is has with its southern neighbor is something it can live with going forward.

President Trump has already indicated to Canadian Prime Minister Justin Trudeau that he would be willing to look at a bilateral free trade agreement between their two countries if Mexico cannot be brought on board at the end of these negotiations. The US realizes that NAFTA has benefited its exports to Canada – the country its largest market – and may hold back in pushing for more access for America’s dairy industry north of the border where Canadians are very protective in this area to keep the peace.

One area that the US may hold steadfast is on American content in automobiles and other vehicles sold within its borders that will impact both Mexico and Canada. Rules and changes relating to the car industry will be extremely contentious. This is because, without that trade, America would have no deficit in goods with Mexico.

Canada also imports more from the US than it exports to the US, this mostly includes automobile parts. Increasing that content lies at the heart of President’s Trump plan to Buy American and Hire Americans. This would have a serious impacts because Canada would then retaliate by restricting US imports, which would very much hurt US manufacturers. 

Renegotiation of NAFTA was likely inevitable and the protectionist agenda of the current US administration. This has now accelerated the process but with a cabinet filled with individuals from Wall Street and top American industries, few believe that Donald Trump will upset the apple cart that, by consensus, has lead to stronger economies for these three countries. This includes a higher standard of living and better working conditions for Americans, Canadian, and Mexicans during the past generation.

Sources:

The North American Free-Trade Agreement renegotiation begins

The US, Canada, and Mexico are renegotiating NAFTA - here's what each country wants

https://www.usnews.com/news/articles/2017-08-16/what-the-us-canada-and-mexico-want-from-a-new-nafta

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