"From the beginning, NAFTA has been a one-way deal, with a staggering number of companies and jobs lost." A tweet from Donald Trump last January underlined the possibility, already aired during the electoral campaign, of withdrawing from the free trade agreement signed by the USA, Mexico and Canada. Now there are several options on the table, from proposals for a slight change to the current agreement, to its complete reconfiguration.
THE TRADE BOOM
Since the North American Free Trade Agreement (NAFTA) went into effect in 1994, US exports to Canada and Mexico have soared (Chart 1). Today these two geographies welcome over a third of the total exports from the United States. In turn, the American market is the main destination for Canadian and Mexican exports. The close trade relations between the USA and the other countries adhering to NAFTA have resulted in a limited trade deficit of the former with Canada (USD 17 billion in 2016) and in a huge deficit with Mexico (USD 66 billion).
Chart 1. US exports to Canada and Mexico (values in billions of dollars)
THE OPTIONS ON THE TABLE
Update – The agreement could be modernized in the light of the progress of the last twenty years on various fronts (technology, protection of intellectual property, e-commerce, environmental constraints and occupational safety rules), or, tightened with more stringent rules on origin of the products, increasing the thresholds of minimum value of regional content (parameter that acts as a distinction for the application of duties on exported goods). Mexico would be in favor of a renegotiation on these terms. Canada, through the Foreign Minister, has expressed its preference for an agreement that remains trilateral.
USE OUT
On the other side of the spectrum is the possibility that the United States will permanently withdraw from NAFTA. This would imply a return to the WTO rules, ie the application of the most favored nation tariffs. Trade relations between the countries would be negatively impacted, also in consideration of the strong integration of their production chains (to give an idea, a vehicle assembled in Canada and exported to the United States has 63% American content). Furthermore, on Mexico's side, in the short term, the uncertainty linked to future trade relations with the United States could push foreign investors to suspend capital inflows, with implications for the country's growth.
BEWARE OF UNDESIRABLE EFFECTS
The measures announced by Trump aim to increase production in the United States by discouraging imports from countries where it is produced at low cost: this could reduce the unemployment rate, which is already at low levels in the United States. On the other hand, US firms may be forced to raise the prices of final goods to cope with lower production efficiency and higher costs (because of the higher level of wages in the US and, in the case of importing firms, due to the reintroduction of tariff and non-tariff barriers). Ultimately, consumers may be paying the price. All in all, who benefits from continuing in the direction of trade restrictions?
