When renegotiating NAFTA, Trump should re-evaluate his premises on international trade

Editor's note:

An extended version of this piece was feature in The Cairo Review of Global Affairs.

Robert E. Lighthizer, the Trump administration’s chief trade negotiator, listed substantially reducing the trade deficit as one of the main United States goals for NAFTA renegotiations, which started this week. Since the North American Free Trade Agreement came into force in 1994, imports from Mexico to the U.S. have increased at a much faster pace than exports from the U.S. to Mexico. The U.S. trade deficit with Mexico has increased considerably, standing today at about $60 billion. And since then, the U.S. has lost about 5 million jobs in the manufacturing sector. 

The figures may seem to bolster President Donald Trump’s argument that trade deficits destroy jobs and therefore his main purpose of NAFTA’s renegotiation to reduce the U.S. bilateral trade deficit with Mexico. But the story is not so simple. Trump’s view of international trade is, to say the least, very unsophisticated. He is looking at the trade deficit to claim that the current trade deals are “unfair.” But there are a number of angles, and many more data points, that should be taken into account before making those claims and, more generally, before assessing the benefits from trade.

First and foremost, focusing on bilateral trade deficits is meaningless as they do not reflect the bigger picture. Often, the trade deficit with a particular set of countries is offset by a trade surplus with other countries. Overall, the U.S. has a trade deficit of about $450 billion a year. Bilateral trade surpluses with Hong Kong, Australia, Chile, and Brazil, for example, offset part of the deficit with countries such as China, Mexico, Germany, and Japan, among others. Thus, even if the renegotiation of NAFTA for some reason results in a reduced U.S.-Mexico bilateral trade deficit, it likely won’t change the overall deficit of the U.S. with the rest of the world. If barriers are imposed on imports from Mexico, American firms and consumers, most likely, will import from somewhere else since U.S. firms are simply not competitive in many industries.

Thus, shouldn’t the focus be on the aggregate trade deficit? Well, that would make more sense, though the question remains: Is it bad for the U.S. to run a large trade deficit? It depends. America’s trade deficit accounts for about 2.5 percent of its gross domestic product. Not too high, but not too low either. Ironically enough, the overall trade deficit of both Mexico and Canada relative to their GDP are also of similar magnitude. Yet, the trade deficit of a country is a reflection of its citizens saving too little and consuming too much. If these fundamentals don’t change, with or without NAFTA, the overall trade deficit will likely remain.

So now, what about the claim that NAFTA destroyed jobs? Here’s a fact: All advanced economies lost jobs in their manufacturing sector, regardless of whether they were running a trade surplus or a deficit. The U.S. is not the exception, but the rule. While the U.S. lost 5 million jobs in manufacturing since NAFTA was signed, it increased its manufacturing output by $800 billion. Thus, this additional data point that Trump has ignored all along hints at a very, if not the most, important point: The vast majority of American jobs that vanished in manufacturing were lost to higher productivity. On average, American workers are able to produce 50 percent more today than they did in the early 1990s. Thus, most of these jobs weren’t lost to Mexico or any other country. They were lost to increases in productivity. Only very few jobs losses in the U.S. can be attributed to NAFTA. Given that more than half of U.S. imports from Mexico are intermediate goods, it means that NAFTA has allowed American firms to become more competitive in making final goods, and thus able to hire more and to export more.

Thus, if the Trump administration wants to really improve the lives of Americans, those that were or were not affected by NAFTA, there is one thing to focus on in the renegotiations: how to make North America more competitive as a block toward the rest of the world, instead of trying to create more barriers to trade within it. But this must be accompanied by proper safety nets for those workers who, because of trade, lost their jobs and now need assistance while transitioning to another career or, if necessary, to retirement. These safety nets are what has been missing from the equation, and if Trump wants to stand out and be the champion of the middle class, this is what he should be focusing on.