High Stakes for North America—and Beyond
The US, Mexico, and Canada are at an impasse over several key US demands. One involves tighter trade rules for the auto sector: for the first time, cars entering the US duty free would need to have high US content. Overall North American content requirements would also increase. In addition, the US wants a “sunset clause” limiting NAFTA to only five more years unless renewed by all three countries and the elimination of a trinational mechanism for mediating disputes. US president Donald Trump has stated that if his negotiators can’t get a deal he likes, he will abrogate the agreement. At a press appearance in mid-October with Canadian prime minister Justin Trudeau, Trump said that he has been “opposed to NAFTA for a long time….I think Justin understands that if we can’t make a deal, it’ll be terminated.”
If NAFTA were rescinded, WTO trade rules would in theory be in force in North America. Tariffs would rise on 62% of the goods that the US imports from Mexico and Canada, on 52% of US exports to Canada, and on 72% of US exports to Mexico. The implications would be significant. A reversion to WTO tariff levels would reduce GDP by 0.12% in the US, 0.55% in Canada, and 0.71% in Mexico after one year, according to an analysis by Scotiabank. While the economic impact may appear to be modest, Scotiabank estimates that it would translate into up to 100,000 lost jobs in Canada, up to 200,000 in the US, and up to 380,000 in Mexico.
But it’s not clear if the US will stick to its WTO commitments. To take just one example, under the WTO rules, US tariffs on Mexican and Canadian passenger cars would be only 2.5%—a level unlikely to support the US goal of boosting domestic automotive manufacturing. By contrast, under WTO rules, tariffs on US-made passenger cars would rise to 5.8% in Canada and to 31% in Mexico. So there is reason to assume that much higher US tariffs would follow. It can also be assumed that Canada and Mexico would retaliate with tougher restrictions on US imports in product categories that are important to US politicians, such as agricultural products.
The stakes for all three economies are huge. Mexico exported $297 billion in goods to the US in 2016 and was a $231 billion export market for American producers. Canada imported $266 billion in US goods and services—more than $1 billion per business day. A major change in NAFTA would be felt in virtually every industry as companies reconfigure their value chains, logistics networks, and product-sourcing strategies. Manufacturers of automobiles, machinery, and consumer durables, along with agricultural producers, would be particularly affected. But the impact would also ripple through the transportation and logistics sectors, as well as services such as retail and finance.
Higher tariffs would also translate into higher retail prices for many products, which in turn could depress demand and prompt manufacturers to shift production from Mexico to low-cost nations in Asia, rather than the US. That would likely hurt American manufacturers that supply key components for goods assembled in Mexico and exported back to the US under NAFTA.
The drive to rewrite trade agreements hardly ends with NAFTA. Renegotiating NAFTA is part of a broader plan to remake the world trading system, an objective that is core to the Trump administration’s worldview. Since the beginning of 2017, the US has taken action on trade arrangements involving countries representing some 80% of global GDP. The US has unilaterally withdrawn from the Trans-Pacific Partnership, suspended talks for a massive trade and investment deal with the European Union, reopened the US-South Korea trade agreement, and launched a sweeping action against China under US trade law. Even an agreement with six small Central American countries that collectively represent only 0.3% of global GDP has been called into question.