During his run for President of the United States, Mr. Trump called the North American Free Trade Agreement (NAFTA), “the worst trade deal ever approved by this country.” His target is Mexico, which runs a $50 billion surplus of trade in goods and services with the United States. Trade with Canada, the third NAFTA party, is essentially balanced.

There are many possible scenarios that describe how the new chapter of the NAFTA story will unfold. This report focuses on three plausible scenarios for a new NAFTA.

The first scenario describes an agreement which includes some novel enhancements, but also entails important new restrictions to address Mr. Trump’s concerns. On net, under this possible outcome, the parties end up with somewhat less open trade.

The second scenario, which is more likely, describes a breakdown of negotiations and a return to trade at arms-length under WTO rules between Mexico and the United States, while a separate deal is sooner or later negotiated with Canada.

The third scenario is one where NAFTA remains little changed but the US Congress enacts a Border Adjustment Tax (BAT) whose effect – if the BAT takes the form currently assumed – is the same as a tariff and export subsidy applied to all trade of the United States, not just to trade with the NAFTA parties. This scenario is the worst of all three in terms of its welfare effects on the NAFTA parties and on the rest of the world. 

This report concludes with an overview of the policy implications for the various trading partners of the United States.