President Trump has called the North American Free Trade Agreement “the worst deal ever,” but one thing might actually be worse: no deal at all.
The fourth round of negotiations to revise the agreement wraps up Oct. 17, but many people close to the talks have expressed doubts that they will succeed.
If NAFTA crumbles, trade among Mexico, Canada and the United States would fall under World Trade Organization rules with modest average tariff rates and an established, if unwieldy, process for resolving disputes.
But the tariff rates, although relatively low, would be higher on U.S. exports than on U.S. imports. Many trade experts say that would hurt U.S. exporters of everything from corn to auto parts and that the United States could end up with fewer jobs while paying higher prices for goods than it does.
Meanwhile, Canada and Mexico would be able to fall back on free-trade agreements they have forged with Europe recently, providing zero tariffs.
Mexican Foreign Minister Luis Videgaray told a Mexican Senate committee this week that the end of the North American Free Trade Agreement “won’t be the end of the world.”
And in some ways Videgaray is right. The world of global trade has far fewer walls and stumbling blocks than it did 23 years ago, when NAFTA went into effect.
Nonetheless, even small tariff differences can have substantial effects, many trade experts say, and could upend established supply chains.
“If NAFTA ends, the tariffs the United States imposes on imports from Mexico would revert (from currently zero) to their WTO levels. For the United States, these tariffs average 3.5 percent” across all goods, Chad Bown, a senior fellow at the Peterson Institute for International Economics, said in an email.
“Mexico’s WTO tariffs are a bit higher — on average 7.1 percent,” he wrote. “So U.S. exporters would go from facing zero tariffs currently for their sales to the Mexican market under NAFTA to 7.1 percent on average without NAFTA.”
For automobiles, the gap could add hundreds of dollars to the price of a car. Or carmakers in Mexico might drop U.S. suppliers subject to WTO rates and look for European auto parts manufacturers, who would not have to pay any tariff under their free-trade pact.
NAFTA’s rules of origin for automobiles would also disappear. Those rules were designed to prevent countries outside North America from using the treaty as a back door into the U.S. market. Under NAFTA, 62.5 percent of the value of an imported vehicle must originate in Canada, Mexico or the United States for that vehicle to get duty-free access to the region.
Without NAFTA, supply chains could reorient themselves. Cars sold in the United States might contain more foreign parts, and Mexican cars sold to Europe or Latin America might use fewer U.S. components.
“U.S. producers would face less market access in Mexico without NAFTA than Mexico would face in the United States,” said Caroline Freund, a senior fellow at the Peterson Institute for International Economics and former economist at the World Bank.
Getting rid of NAFTA could also hurt the agriculture industry, which is strong in the states Trump carried in his presidential campaign. Since NAFTA was enacted, U.S. food and agricultural exports to Canada and Mexico have more than quadrupled, to $38 billion in 2016, according to the Fresh Produce Association of the Americas. And Mexican agricultural exports have given consumers year-round access to fruits and vegetables that had been available only during certain seasons.
A collapse of NAFTA could also boomerang on some of the accord’s harshest critics, especially labor and environmental groups that want to toughen up what they see as ineffective side agreements to the original treaty. Without NAFTA, however, those agreements would simply vanish.
Leo Gerard, president of the United Steelworkers union, says NAFTA was sold to the American public with “a bag full of lies.” He says it has done little to bring good wages to Mexico and has therefore siphoned jobs to Mexico away from the United States and Canada. He singles out auto factory jobs; half his members make auto parts.
But Gerard isn’t ready to simply shred the NAFTA agreement. He wants to fix it with enforceable labor standards and wages.
“If you just rip it up, it’s worse,” he said. “If you bail out of this, you’re going to have to have new rules.”
Mexico, however, would not escape damage from a collapse of NAFTA. NAFTA has helped generate confidence in all three nations, which has been especially helpful in attracting investment to Mexico. A collapse of the accord could choke off some of that investment.
Moreover, the WTO tariff numbers are averages and in some areas — especially in agriculture, sneakers and textiles — the United States could impose much higher duties. It would impose a 25 percent tariff on pickup trucks, 48 percent on sports sneakers, and between 5 and 20 percent for textiles, Freund said.
Even with the free-trade agreements Mexico has with Europe and others, it will be hard- pressed to divert goods from the United States, where Mexico sends 80 percent of its exports.
In a roundabout way, the collapse of NAFTA could help Mexico sell those goods. The end of the agreement probably would undermine confidence in Mexico’s currency, the peso, which has declined nearly 6.5 percent over the past month amid squabbling over trade. That could further lower costs of manufacturing in Mexico, making it even harder for the United States to compete with its southern neighbor.
The impact a NAFTA collapse would have on U.S.-Canada trade is less clear. Before NAFTA, the two nations had a bilateral free-trade agreement that might come back into force after NAFTA. If so, each country would have zero tariffs on the other. If that treaty were not brought back into effect, then Canada could impose an average tariff of 4.2 percent on U.S. goods under the WTO rules.