NAFTA: The trade pact has stirred debate and controversy for more than two decades.
President Trump used the North American Free Trade Agreement as a lightning rod during his election campaign last year. At his rallies, Trump called the trade pact — which eliminated almost all tariffs and other trade barriers between the United States, Mexico and Canada — a disaster, the worst trade deal in U.S. history. NAFTA, he said, had spurred the decline in the U.S. manufacturing industry and encouraged a wave of illegal immigration from Mexico. As president, he came ever so close to terminating the agreement in April.
Yet while NAFTA looms large in political rhetoric, most Americans probably couldn't tell you who wrote the pact and why, what's at stake in its renegotiation and how profoundly it has already influenced their lives.
Who wrote it, and why?
NAFTA came into effect during President Bill Clinton's first term, but was the brainchild of Clinton's Republican predecessors, George H.W. Bush prime among them. Mexican tariffs were far more protectionist than American ones at the time, and business leaders had lobbied successive governments for a free-trade agreement with Mexico to match one already in place with Canada. With Japanese productivity booming and the European Union forming around the same time, keeping the United States competitive was a major concern. Despite pushback from Democrats and union leaders concerned about labor and environmental protections, Clinton championed the broadened agreement alongside Rep. Newt Gingrich (R-Ga.), then the House minority whip.
On paper, the agreement isn't something one can just breeze through. It's more than 1,000 pages long — reflecting the work of teams of trade lawyers laying the complex legal groundwork for the reorganization of major supply chains to reflect a new transnational reality. One of the terms most closely associated with NAFTA is outsourcing: the process through which companies take advantage of trade agreements to put their operations in the country that's most cost-effective. Untangling these retooled supply chains is part of what would make NAFTA so costly to withdraw from. The agreement became a conduit for that new economic ideology, which was already emerging as technology improved global transport: Let corporations operate across borders with minimal regulation, and they will provide cheaper goods and more jobs.
The Trans-Pacific Partnership or TPP, which Trump scrapped in the first week of his presidency, would have expanded NAFTA-like trade deregulation to more countries. Much of the TPP's language is expected to be adapted into the new NAFTA text.
Is the deal really as bad for American workers as Trump says?
NAFTA led to huge growth in trade across North America. But it also coincided with rapid technological advances that further mechanized manufacturing, as well as China's emergence as a major manufacturing power. That makes it hard to know just how much of the decline in American manufacturing is attributable to NAFTA.
“Trump is right that the 1994 agreement with Mexico and Canada displaced US jobs — some 850,000, most of which were in manufacturing. But he is wrong in his claim that American workers lost out to Mexican workers because US negotiators were outsmarted,” wrote Jeff Faux, the director of the Economic Policy Institute in Washington. “The interests of workers were never a priority for either American or Mexican negotiators.”
Other economists point to different factors. Shushanik Hakobyan and John McLaren found that while NAFTA lowered wage growth for some blue-collar workers, its effect on American wages was small. David Autor, David Dorn and Gordon Hanson found no discernible impact on U.S. wages from trade with Mexico and Central America. Autor asserts that China’s entry into the World Trade Organization in 2001 had a far bigger effect on U.S. workers.
Nevertheless, NAFTA's effects were felt viscerally, especially in the auto industry. Cheaper labor and the elimination of tariffs with Mexico drove automobile manufacturing south, furthering a shift in production already underway from unionized Detroit to less regulated states in the South. Mexico's competitive advantage on labor also drove specialization in agriculture that was labor-intensive, such as vegetables. North of the border, energy-intensive cash crops like corn and soybeans took prominence. The United States now exports so many of those crops that American farmers are some of NAFTA's staunchest supporters. There is lots of debate over NAFTA's net effect on employment in both countries, but since wages in Mexico are a fraction of what they are north of the border, the post-NAFTA period has been one of large-scale migration northward.
The relocation of significant portions of the auto supply chain to Mexico accounts for much of the United States' growing trade deficit with its southern neighbor. But for all Trump's complaints about U.S. jobs leaving for Mexico, the trends of mechanization and the slowdown in overall growth of the auto industry in the NAFTA era may be more responsible for those job losses. There are simply fewer automotive industry jobs now than there were three decades ago.
“How Trump can reverse that trend is unclear to me,” said Gary Hufbauer, a trade specialist at the Peterson Institute for International Economics. “If he could get something out of this negotiation which would incentivize a company, say GM, to open a factory in the U.S. — for political purposes that’s great. But it is like chasing the rainbow. It's not going to work with economics.”
Why is NAFTA being renegotiated now?
In a word: Trump. The president campaigned on renegotiating the trade deal, and he informed Canada and Mexico of his intention to reopen talks soon after taking office.
The agreement is also dated. Intellectual property, e-commerce and developments in all sorts of other sectors need to be included in a revised document.
Here's how the process will unfold: Teams of negotiators from the three countries will meet at least seven times over the next six months. They're hoping to have the agreement wrapped up before the end of the year, well ahead of Mexico's next presidential election. (Experts are skeptical of the timeline. As one told The Washington Post, “It's hard for me to see how you have a resolution that everyone can call a win-win in that time frame.")
What does each country want?
Last month, the Trump administration laid out a very long list of things it wanted from the renegotiation. When talks began Wednesday, U.S. Trade Representative Robert E. Lighthizer promised “major improvements,” not a “mere tweaking.”
Here are some of the most important issues:
Balancing flows of trade: America has made this its top priority. The United States and Mexico do about $525 billion in trade each year, but Mexico exports about $63 billion more goods than it takes in. Canada, the United States' second-largest trading partner, also has a small trade surplus with the United States.
Trump has said that this is unacceptable, and Mexico and Canada worry that the United States will try to make it harder for companies in those countries by slapping them with the kinds of tariffs and restrictions that NAFTA was designed to eliminate.
“Trump equates a deficit with unfair practices,” said Antonio Ortiz-Mena, a Mexican economist with the Albright Stonebridge Group who helped negotiate the original deal. “That's completely wrong in terms of basic economics.”
Ortiz-Mena said that an effort to make Mexican exports to the United States more expensive or less desirable would be met by vociferous opposition. The move would cross a red line that would be antithetical to NAFTA's mission of free trade, he said. Both Mexico and Canada are exploring options for free-trade agreements with other major trading partners, such as Brazil and China.
Scrapping the dispute resolution mechanism: Another key demand from the Trump administration is to scrap NAFTA's dispute-resolution panels, which mediate trade disagreements. Trump has called these a violation of U.S. sovereignty.
The panels, which are enshrined in Chapter 19 of the agreement, allow an independent, binational team to review charges of unfair trade practices. Since NAFTA's inception, about 73 of these panels have reviewed issues between the United States and Canada. They have decided in Canada's favor on issues like American duties on softwood lumber.
Canada has said it will staunchly oppose this effort. A senior official told the Globe and Mail that this is a “red line,” and that Canada will walk away from the negotiations if the United States won't relent. Ortiz-Mena said Mexico would probably oppose the move the scrap the panels, too, because that would make it much harder for countries to protect their own industries against dumping.
Improving labor standards: Canada's negotiating team has said it wants to use the NAFTA renegotiation to improve labor and environmental standards. They want language in NAFTA that would ban participating countries from weakening environmental protection to attract business investment. They'd also like to see stronger language on gender and indigenous rights.
What are their chances at success?
Trump and his allies talk a big game. But most experts don't think NAFTA will fall apart. Though there may be some squabbling, most everyone thinks an updated deal will come together and that it will look pretty similar to what's in place now.
That's in large part because the larger trends that created NAFTA in the first place can't be easily reversed. Even the unlikely possibility of Trump's withdrawing from the agreement might not turn back that tide. The economies of many red states along the border are intricately tied to cross-border trade.
“I don’t expect much to come out of the whole process. Trump talked up the possibility of walking out of NAFTA, but he was talked out of that,” said Rob Scott, a trade analyst at the Economic Policy Institute. “There are too many connections between the economies to tear it up. They’ll end up nibbling around the edges.”
In other words, political necessity has brought about this renegotiation, but whether it actually changes employment, wages and conditions for North American workers depends on how much Trump is willing to break with his Republican colleagues and their corporate backers.
Adding more political pressure, negotiators want to wrap up deliberations by the start of next year's contentious election seasons in Mexico and the United States. Trump and Mexican President Enrique Peña Nieto — both suffering from abysmal approval polls — will want to score victories on trade, however anecdotal, that they can take to campaign rallies.