Trump and NAFTA: New deal won’t be easy

Moving quickly to redirect trade policy, the president irks Mexico with talk of replacing the North American trade pact. Experts warn he won't get all he wants in the tough negotiations ahead.

Jonathan Ernst/Reuters
President Trump is applauded by Vice President Pence and House Speaker Paul Ryan (R) of Wisconsin as he arrives to speak at a congressional Republican retreat in Philadelphia, Jan. 26, 2017.

For years, Donald Trump has insisted that international trade is a high-stakes contest that the United States perennially loses. Now that he is president, he is moving quickly to try and reverse the way the nation plays its trade cards.

Changing US positions on existing trade deals and treaties is a quick and easy way to do this, which is why one of his first acts was pulling out of the Trans-Pacific Partnership negotiations. Next up is an older, established pact that’s long been politically contentious: the North American Free Trade Agreement, better known by its acronym “NAFTA.”

President Trump has told Mexico and Canada and he wants to renegotiate NAFTA, or perhaps even scrap it. But it won’t be easy for the new administration to strike a better trade deal. Mexico and Canada both have changes they’d like too if the pact is reopened. The political relationship between the US and Mexico is fast deteriorating, due to Trump’s insistence that Mexico will pay for his new border wall.

The question is what Trump really wants. Would he be satisfied with tweaks, and replacing the trilateral NAFTA with two new country-to-country pacts? Or does he want to explode the deal and slap new taxes or tariffs on Mexican exports to the US?  

“Is the incendiary campaign rhetoric about NAFTA simply the opening gambit of a negotiating strategy, as some suggest, or is Team Trump really sincere in its desire to sink the most successful hemispheric trade deal of all time?” writes Matthew Taylor, senior fellow for Latin American Studies at the Council on Foreign Relations.

If it’s the latter, US companies such as Ford and GM that have built their manufacturing processes around cross-border processes will be very unhappy. Mexico – more dependent on cross-border trade than the US – could see its economy slip. On Thursday, White House press secretary Sean Spicer floated the idea of a 20 percent tax on imports from countries "like Mexico," then backpedaled later in the day, saying the tax was just one way of raising revenue and that the rate could be lower.

NAFTA renegotiation is about more than one trilateral trade deal, of course. It’s of a piece with President Trump’s “America First” way of looking at the rest of the world. This emphasizes the transactional and competitive aspects of international relations, even (perhaps especially) with US allies. They’ve been winning, so we’ve been losing. That’s an essential Trump message.

“We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength,” said the new president in his inaugural address last week.

In this context Trump’s call for reopening NAFTA pairs up with his insistence on building a new southern wall. Both target perceived intrusions from Mexico – one of products, the other of people. Trump's rhetoric has irritated Mexican officials and led to an escalation of US-Mexico tensions.

Mexican president cancels trip

On Thursday, Mexican President Enrique Peña Nieto canceled his planned visit to Washington next week, responding to his own domestic pressure to act more forcefully against his country’s northern neighbor. The proximate cause was Trump’s promulgation this week of an executive action authorizing US agencies to begin planning and other work on a wall the president still insists Mexico will pay for.

“I regret and condemn the United States’ decision to continue with the construction of a wall that, for years now, far from uniting us, divides us,” said President Peña Nieto in a video message Wednesday night.

NAFTA is not as emotional an issue as the wall. But for Mexico, the stakes involved in a potential revamp of the trade deal might be far higher.

Signed in 1992, NAFTA eliminated most tariffs on products traded between Canada, Mexico, and the US. Over time it has led to further lowering of regulations and other non-financial barriers. Mexico has remade much of its economy around the cross-border flows NAFTA has encouraged. Some 900,000 Mexicans now work in auto factories, for instance. Many of these import parts from the US and other countries, and send finished cars north or to Asia and Europe.

Overall, 80 percent of Mexican exports go to US. US exports to Mexico have for their part increased by three and a half times since NAFTA came into force.

In the US, NAFTA has led to lower-priced consumer goods, and a higher GDP over time, according to many experts. Its effect on jobs has been less clear.

Some experts argue that NAFTA has had little impact on a US manufacturing sector where the rise of computer-controlled machines and other large factors have led to a steady decline in employment.

“The overwhelming majority of the jobs we’ve lost since NAFTA have been to automation, not trade,” says Matt Gold, a law professor at Fordham University and former deputy assistant US Trade Representative for North America.

Others say trade deals such as NAFTA helped accelerate that decline. That is certainly Trump’s view. On Thursday he told a GOP policy retreat that NAFTA was a “terrible deal, a total disaster for the United States” that had led to the closure of “thousands and thousands of plants” across the country.

No great deal 

After 20 years, any trade deal can get creaky. NAFTA is no exception. All of its signatories have changes they would like to make. Mexico would like faster and better transit across the border for trucks – something that might not be popular with a Trump administration that wants to erect more physical barriers. Canada would like to lower barriers to entry to the US for Canadian softwood lumber.

In any case, it won’t be a quick finish. Given the tensions and the stakes involved on the US-Mexico side negotiations are likely to be tough and lengthy. Then there’s Congress, sure to be lobbied heavily by businesses that rely on trade with Mexico.

In the end, Trump will realize he can’t get everything he wants, says William Reinsch, a distinguished fellow at the Stimson Center and former president of the National Foreign Trade Council.

“He will be faced with the choice of walking away and doing something drastic, or essentially folding but declaring victory,” says Mr. Reinsch.

One possible outcome is a modernized treaty split into two pieces: a bilateral US-Mexico trade deal and a corresponding US-Canada pact. That would allow Trump to say he’d reversed NAFTA without changing that much of the underlying substance.

“I don’t see a quick end to these negotiations. But politically that may not matter as long as you can change the name and a few of the moving parts,” says Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, a Washington-based think tank.

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