The United States and Mexico appear to have taken the first steps toward renegotiating the North American Free Trade Agreement, according to a Mexican government document, walking down a path that would fulfill one of President Trump's big campaign promises and potentially transform the hemisphere's economy.
The White House did not respond to a request for comment and officials in the U.S. Congress said they had not yet been notified of any formal action. But trade economists said the process might be tied to U.S. legislation passed under former president Barack Obama that gives the president power to quickly broker a new trade agreement. Called fast-track authority, it requires the president to notify Congress 90 days before entering into negotiations for a new agreement.
If the White House is indeed proceeding under fast-track authority, that suggests Trump could intend to scrap NAFTA altogether and forge bilateral trade deals with Mexico and Canada instead, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. Trump and his administration have expressed a preference for bilateral deals, which they say allow the United States to better wield its economic heft at the negotiating table.
"I think they want to retire the name NAFTA, say they got rid of it, then put it into the history books," said Hufbauer.
It's still possible, however, that the process will be terminated if the U.S., Mexico and Canada agree to terms overhauling NAFTA.
Renegotiating NAFTA was one of the major promises Trump made on the campaign trail, where he criticized the trade pact, which took effect in 1994, for hollowing out America’s manufacturing sector. The news comes as Trump reassesses America's system of trade and immigration. He has already pulled out of the Trans-Pacific Partnership, a Pacific Rim trade deal crafted by the Obama administration.
This historic shift in trade policy is likely to have wide-ranging implications for multinational companies, which have strung factories and facilities across the North America to take advantage of NAFTA’s terms. It could also portend changes for American consumers, who for decades have enjoyed cheap goods manufactured just over the border.
The specific effects on American businesses and consumers would hinge on the terms of the trade deals that replace it. But if tougher barriers to Mexican imports were to provoke retaliatory action by Mexico, the effect could be damaging to American manufacturing communities, said Hufbauer. “There would be a lot of localized pain of going down this path, and there may be some products that are suddenly more expensive than they otherwise would have been.”
For Mexico, the ultimate goal in the trade negotiations with the United States is to maintain the flow of free trade that NAFTA has created between the two countries. The United States is Mexico’s largest trading partner and the destination of 80 percent of its exports.
“We want to arrive at an agreement,” Foreign Minister Luis Videgaray told reporters on Wednesday.
Mexican officials plan to use the 90 day consultation period to meet with domestic industry leaders in farming, manufacturing, textiles, petroleum, and other sectors, to see what aspects of NAFTA could be improved. The discussions will be coordinated by the secretary of the economy.
“This gives us a very solid preparation to enter the dialogue once the 90 days passes,” Videgaray said.
At the same time, Mexico is also looking to expand trade ties with other countries, in case trade with the United States gets restricted. Mexican officials have already begun talks with Argentina and Brazil, and are interested in discussions with Malaysia, Australia, Singapore and others.
Trump has already clashed publicly with Mexican President Enrique Peña Nieto. Following a spat on social media on Jan. 26 over who would pay for Trump’s border wall, Peña Nieto called off a scheduled visit to Washington the following week. The next day, Trump and Peña Nieto discussed the U.S.-Mexico relationship by phone for an hour.
During the campaign, Trump announced his intention to renegotiate the sweeping trade deal between the United States, Canada and Mexico on his first day in office.
"If I win, day one, we are going to announce our plans to renegotiate NAFTA," he told a crowd in Greensboro, N.C., in October.
Influential in the negotiations are likely to be two men who are not yet confirmed for their positions: Commerce Secretary nominee Wilbur Ross and Trump's pick for the U.S. Trade Representative, Robert Lighthizer.
NAFTA became a divisive issue in the 2016 campaign, as critics on both the left and the right disparaged it for siphoning off good-paying American manufacturing jobs. Trump repeatedly criticized former President Bill Clinton’s role in negotiating NAFTA, calling it “the worst trade deal maybe ever signed anywhere.”
Economists have generally disagreed, or expressed more nuanced concerns. In a panel of 41 prominent economists surveyed in 2012 by the University of Chicago, 85 percent agreed or strongly agreed that Americans were better off under NAFTA than previously existing trade rules among the U.S., Canada and Mexico, while only 5 percent said they were uncertain. None disagreed with the statement.
More recent research by John McLaren of the University of Virginia and Shushanik Hakobyan of Fordham University has shown that blue-collar workers in industries most affected by NAFTA had lower wage growth over the 1990s compared with other workers. The study concluded that the overall impact of NAFTA on American wages was small, but heavily concentrated in some communities.
The trade pact dates to 1992, when President George H.W. Bush negotiated it in his final year in office. Congress approved the deal the next year under Clinton, and it finally took effect in 1994, establishing an unprecedented free-trade zone across North America.
Over the next decade, the flow of goods and services between the U.S. and Mexico more than quintupled.
By reducing barriers to trade, the deal aimed to knit the countries of North America closer together and expand their economies. It also specifically aimed to help the struggling Mexican economy. By raising the standard of living, many supporters argued the deal would cut down on illegal immigration from Mexico to the United States.
In his criticism of trade deals, Trump has formed an unusual alliance with labor-friendly figures on the political left. Former Democratic presidential candidate Bernie Sanders has said he hoped “very much that President Trump will come on board and work with us as we revamp in a very fundamental way our trade policies.”
Republicans, however, have been more traditional defenders of open trade. who have traditionally viewed free trade as a driver of economic growth. “As I frequently tell my friends in Mexico, we can't get a divorce. We need to figure out how to make this marriage work," Senate Majority Whip John Cornyn (R-Tex.) told CNN recently.
Trump does not require Congressional approval to exit NAFTA. Article 2205 of the agreement allows any party to withdraw six months after providing written notice to the other parties. Trump would have to take additional steps to raise tariffs on imports from those countries.
Ross echoed the need to renegotiate the deal in his Senate confirmation hearing on Jan. 18. He criticized the deal for its weak enforcement on environmental and labor standards, and said that NAFTA was “logically the first thing” for the Trump administration to work on.
“All aspects of NAFTA will be put on the table,” Ross said.