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Semi trucks headed for Windsor, Ontario, exit onto the lane towards the Ambassador bridge in Detroit, Michigan, U.S., April 26, 2017.  REUTERS/Rebecca Cook - RTS148ZY
Brookings Now

NAFTA renegotiation: Separating fact from fiction

Amanda Waldron

While most of this summer’s news from Capitol Hill has centered around health care, North Korea, and the investigation into the Trump campaign’s Russia ties, the White House has been quietly moving forward on one of its signature promises to voters: a renegotiation of the North American Free Trade Agreement (NAFTA), with talks launching this week.

On the campaign trail, Donald Trump consistently called NAFTA “the worst trade deal” the United States had ever signed, and in one of his first official acts as president signed an executive order moving to renegotiate the agreement. After notifying Congress of its intentions to renegotiate in the spring, the Trump administration unveiled its major objectives in July. Chief among them was to reduce the U.S. trade deficit, which the president has blamed for shuttering factories and contributing to significant job losses in the U.S. manufacturing sector.

This week, top trade officials from the United States, Mexico, and Canada are meeting in Washington, D.C. to submit their proposals and revisit the terms of the 23-year old trade pact. If all three nations can come to consensus on a new deal in the coming months, President Trump will still have to get the changes approved by Congress.

But are President Trump’s claims about NAFTA and its effect on the U.S. economy true? And how feasible are his goals for renegotiating the agreement? These are just some of the questions Brookings experts have explored in the research outlined below.

NAFTA is a net positive for America

President Trump has bemoaned NAFTA for having a negative impact on U.S. employment and the trade deficit, but Brookings experts argue that the benefits of NAFTA have largely outweighed the costs.

While it is true that the United States has lost nearly 6 million manufacturing jobs in recent years, advances in technology and higher labor productivity—not North American trade—have been the primary drivers of manufacturing job losses, according to Joshua Meltzer and Dany Bahar, who are both experts in the Global Economy and Development program. In fact, they estimate that U.S. trade with Mexico has led to little over 100,000 net manufacturing job losses—equivalent to about 0.1 percent of the U.S. labor force. To the contrary, they write, NAFTA has allowed U.S. companies to access new markets for their exports, reduce their costs of production, and create even more jobs.

Similarly, the growth of the U.S. trade deficit does not indicate that the United States is “losing out” in international trade. Meltzer and Bahar argue that the trade deficit with Mexico, which stands at about $60 billion today, is not the right measure of the benefits of NAFTA, but rather is a reflection of the integration of the U.S. and Mexican economies and supply chains. Moreover, Bahar argues that reducing the U.S.-Mexico trade deficit won’t have much of an impact on the overall U.S. trade deficit, which is affected by trade surpluses and deficits with many other U.S. trading partners.

Mexico and Canada are leading American trade partners: 79 percent of Mexico’s total exports in 2013 went to the United States, and the United States exports more to Canada and Mexico than to any other countries. This tariff-free trade, as Joseph Parilla of the Metropolitan Policy Program at Brookings outlines, allows North American supply chains to operate seamlessly across the continent and to compete against similar regional production networks in Europe and Asia.

Canada, the United States, and Mexico aren’t just partners in trade, they’re also partners in production. The United States depends on the imports of intermediate goods—steel or plastic, for instance—more than from other parts of the world, with Canada and Mexico supplying 50 percent of all U.S. imported intermediate goods. Through NAFTA, American firms can import intermediate goods at a lower cost, and are therefore able to sell their final goods at a lower cost to consumers, as Dany Bahar explains in a recent episode of the Brookings Intersections podcast. In the same podcast, Vanda Felbab-Brown, a senior fellow in the Brookings Foreign Policy Program, argues that these joint North American production chains have been one of NAFTA’s greatest benefits, translating into significantly lower costs for consumers on everything from avocados to cars.

Last, as Meltzer argues in a recent Unpacked video, the United States has used NAFTA to sustain economic growth and democracy in Mexico, which in turn has had a positive impact on both the economy and national security of the United States.

The stakes of NAFTA renegotiation

Should the three countries succeed in revising the terms of NAFTA, or should the United States decide to simply withdraw from the agreement, the benefits from the agreement for American businesses and consumers could be put in jeopardy.

While it is common to renegotiate trade agreements, Meltzer explains that an “update” of NAFTA was actually already achieved through the Trans-Pacific Partnership (TPP), from which President Trump formally withdrew the U.S. during his first weeks in office. Under the TPP, the United States would have gained improved market access to Mexico and Canada while giving up almost nothing. He argues that without the TPP, the United States will likely have to make greater concessions to both countries in any renegotiation.

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Also at stake is the aforementioned joint production chain—the flow of intermediate goods that allows U.S. businesses to compete on the global market. Certain areas in the United States may stand to lose more than others. As Joseph Parilla explains, NAFTA supplies upward of 60 percent of intermediate goods in manufacturing states like Michigan, as well as in states along the northern and southern borders, such as North Dakota and Arizona. Should the outcome of any renegotiation result in higher prices for Mexican imports, export cities in these states are likely to suffer. As Parilla puts it, “To export price-competitive cars, Michigan must be able to import cost-competitive components.”

American consumers also stand to lose from any disruption in North American free trade. Without the flow of cheap intermediate goods across the continent, firms will likely pass on higher production costs to consumers in the form of higher prices. Vanda Felbab-Brown argues that those most hurt could be lower-income Americans, many of whom voted for Donald Trump and who would most feel the effects of higher-priced goods.

Beyond trade, a weakened NAFTA could reinforce the problems that President Trump has outlined in regard to the U.S.-Mexico relationship. In particular, Felbab-Brown argues that efforts to undo NAFTA could worsen economic conditions in Mexico and reduce job opportunities there, prompting more Mexicans to seek to enter the United States illegally or to join criminal groups in Mexico.

Non-trade-related improvements to NAFTA

While NAFTA renegotiation has focused primarily on trade, two less-discussed but nonetheless important aspects of the agreement deserve attention.

First, NAFTA contains a “bill of rights” for telecommunications providers and users that have largely benefited American telecommunications companies. Stuart Brotman, formerly a nonresident senior fellow at Brookings, calls for expanding the scope of these provisions by removing several trade barriers that have emerged in the 23 years since the treaty’s implementation, including international roaming rates, restrictions on cross-border data transfer, and more.

NAFTA also contains important rules and regulations for governing cross-border investment among the United States, Canada, and Mexico. Geoffrey Gertz, a post-doctoral fellow in Global Economy and Development, explains why it may be in the best interest of all three countries to revisit these investor protections and, in particular, an increasingly controversial legal mechanism known as an investor-state dispute settlement.

Finally, Felbab-Brown argues that instead of altering the agreement itself, the Trump administration should seek to deepen collaboration with Mexico through binding side agreements primarily focused on labor, environmental, anti-corruption, or anti-money-laundering regulations.

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