NAFTA in the Crosshairs

NAFTA in the Crosshairs

President Trump looks set to fulfill campaign promises on renegotiating the North American Free Trade Agreement (NAFTA), which he says has hurt workers and allows the United States to be taken advantage of. A letter Thursday to congressional leaders notified them that negotiations with Canada and Mexico are set to begin.

NAFTA was implemented in 1994 and designed to bring North America closer economically by eliminating tariffs and putting in place dispute processes in addition to agreements on labor and environmental standards. On those measures, the agreement has largely succeeded, although a growing number in the United States disagree that the goals were worthwhile, to begin with. United States imports from Canada have roughly doubled since 1994, while Mexican imports are six times higher.

Bi-lateral trade in goods between NAFTA members, 1985-2017. Source: U.S. Trade Representative.

Not all economists agree on the overall effect NAFTA has had on employment in the United States. Many economists who support free-trade agreements argue that, rather than reducing employment, the long-term impact of agreements like NAFTA is to shift jobs in the United States from low to high-skilled industries and boost overall wages. Those more skeptical of free-trade largely believe that NAFTA has primarily allowed companies to boost profits through job outsourcing while Mexico’s employment gains are the United States’ losses. It is also possible that while overall the United States has benefited, certain sectors, such as manufacturing, have been net losers.

In order to renegotiate the agreement, the President must provide 90 days written notice to Congress, thus the need for Thursday’s letter. One sticking point for the administration appears to be in how the agreement treats rules of origin rules. The agreement contains safeguards so that one country cannot import goods that are essentially finished, provide very little value-add to them, and enjoy the duty-free access to other markets. The President is pushing to change the qualifications designating the country of origin for a good.

There is still a long way to go before any modifications of the agreement can be made. At present, it is unclear what concessions the President is willing to make in order to coax Canada and Mexico to agree to modify NAFTA, and after angering a substantial amount of Mexican and Mexican-Americans with campaign rhetoric and a pledge to make Mexico pay for a border wall, Trump and his administration have also had a recent row with Canada over trade in soft lumber. Then, there is always the most difficult part of any deal – getting Congress to actually approve it.

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