The High Cost of Tampering with NAFTA

Never much of a fan of America’s trade policies, Donald Trump made them a chief target of his presidential campaign. He panned US trade agreements worldwide, contending that they were ineptly negotiated, rigged against the US, and harmful to the American economy and its companies and workers. Trump’s attacks on the North American Free Trade Agreement (NAFTA) were particularly scathing. He relentlessly criticized the three-way pact joining the US economy with those of its nearest neighbors and largest trading partners, Mexico and Canada, characterizing the arrangement as the worst trade deal ever made. Fixated on the US’s large commercial deficit with Mexico, Trump threatened, time after time, to scrap the pact unless it was overhauled from top to bottom. In Mexico and Canada, Trump’s continuing assault on NAFTA was viewed as outright intimidation, which is hardly the best strategy for initiating a serious negotiation among allies. While no one doubted that the 25 year-old agreement could be improved and updated, the Mexicans and Canadians resisted the notion promulgated by Trump that NAFTA was fatally flawed from the outset, and that a thorough revamping was in order. Particularly outrageous was the idea of discarding this tripartite free trade arrangement, which now governs more than a trillion dollars in commerce per year.

Remarkably, after little more than a year of tension-filled talks, US and Mexican negotiators have reached a preliminary agreement that would largely preserve, in both concept and content, the original NAFTA. To be sure, even though the basic elements of an accord are now mostly in place, a myriad of essential details are still to be worked out. One looming roadblock is the remaining substantive differences between Canada and the US, compounded by the Canadian government’s simmering anger at what it perceives as Trump’s persistent bullying and general disrespect. After a short suspension, Canada and the US are once again negotiating and appear to be making progress toward an agreement that would keep NAFTA together. Still, reflecting their deep frustration with US demands, many Canadians voice support for a more defiant stance from their government. And yes, the US Congress could block the final ratification of the new treaty. Yet, at this point, regardless of the outcome of the the United State’s midterm elections, it is unlikely that congressional approval will be denied to an accord endorsed by President Trump, and supported by key labor leaders, powerful pro-business associations, and most US corporations and agricultural producers.  

If, as now appears likely, the three governments stick to the framework of the preliminary agreement, the core features of NAFTA would be retained, and at least some of the major area of contention among the three nation should diminish. The lion’s share of commerce among the US, Mexico, and Canada would remain unburdened by tariffs and almost surely keep expanding. And the broader integration of the three economies would continue pretty much unchecked. True, a few more cars will be produced in the United States, and a few less in Mexico and Canada. The same with car parts and a number other manufactured goods. US pressure also succeeded in modifying mechanisms for dispute resolution, and securing increased protection for intellectual property. But all this can hardly be considered an upending of NAFTA. As a last item, Trump has also been angling for the purely symbolic change of renaming NAFTA.

The president and his advisors believe these are all changes that will benefit the US. In contrast, most economists foresee a setback for all three countries. NAFTA, they argue, will be weakened and less productive, even if not fundamentally altered. Even the contentious “sunset” provision, which requires regular reviews of the pact and opens the way for members to withdraw, has been softened sufficiently so that Canada and Mexico no longer view it as seriously menacing the pact’s longer-term stability—though they would have preferred a strong tripartite endorsement to NAFTA’s permanence. Whatever it winds up being called, NAFTA is likely to remain largely intact for now.

It was Trump’s exaggerated threats and unreasonable demands that forced Mexico and Canada, both reluctantly, to renegotiate NAFTA and accept a number of unwanted alterations insisted on by Washington. If NAFTA is preserved, it is Mexico that will deserve most credit.  In response to the multiple demands of Trump’s White House, Mexican officials responded pragmatically and intelligently. Early on, they realized that, despite the obvious political risks of angering many of their constituents, finding ways to accommodate Washington was better than losing NAFTA entirely, and that like it or not, they had to yield some ground, make some concessions to US pressure, and take some hits to their economy. They also had to swallow the bitter pill of giving Trump the opportunity to claim another triumph for his policies. The Mexicans were painfully aware that close, continuing commercial relations with the United States, which purchases 80 percent of their exports, were vital to the Mexican economy—which relies heavily on US markets, investments  and remittances. The incoming Mexican president, the left-leaning Andres Manuel Lopez Obrador (commonly called AMLO), differs substantially with President Trump on most issues, but he too recognized the perils of having an unresolved dispute with Trump hanging over his government from his first day in office. Polls suggest that many of AMLO’s voters preferred a stiffer resistance, a show of defiance, to US ultimatums and arm-twisting on NAFTA. But no Mexican president would want to confront a festering  conflict with the US, especially during his first days in office. Canada, however, is a more prosperous nation with a greater range of options, and may turn out less willing to accommodate Trump. Still, the Canadian prime minister, like the Mexican president, has to take account of  the sheer economic power wielded by the United States. Like Mexico, some 80 percent of Canada’s exports wind up in the hands of its next door neighbor, which is also its largest source of foreign investment.

For both Mexico and Canada, the uncertain and painful renegotiation of NAFTA comes with high costs—beyond the expected economic losses. Resolving the NAFTA dispute will not repair the damage Trump has inflicted on US relations with both Mexico and Canada.  Across Mexico, distrust of Washington and animus toward the US president are higher today than they have been for a generation or more.

So much of the progress toward more cooperative and constructive US-Mexican bonds has been undone—and the bitterness between the two nations could get worse. Trump’s verbal assaults on NAFTA and threats to slash longstanding economic ties to Mexico are only partly responsible. More fuel was added by his tirades against Mexican immigrants, the callousness and racist undertones of his immigration polices generally, and his rants about building a border wall, to be paid for by Mexico. Moreover, ordinary Mexicans have been left angry and resentful by the consistent revelations in recent years of the widespread animosity among Americans toward Mexico and Mexicans.

Trump never even tried to engage Mexico in shaping a mutually productive bilateral agenda—which might have included such critical challenges as trade, immigration, security, drug policy, and water and energy resources—or attempt to pursue these central issues in ways that are responsive to both nations’ needs. Instead, Trump’s rhetoric has been consistently hostile and insulting. Every issue has been portrayed as a zero-sum contest, in which US has always emerged the victim. Yes, NAFTA will continue—but a wedge has been driven between the United States and its two most important allies and partners in the world.  

For sure, other Latin American nations have been watching closely. Even though China has replaced the United States as the largest trade partner of many countries of the hemisphere, most Latin American economies are still heavily reliant on US trade and investment (though assuredly not to the extent of Mexico or Canada). And many nations have established high levels of cooperation with the US on other fronts. But governments and their citizens across Latin America have become increasingly  wary and mistrustful of the Trump administration. In the short run, they—like  Mexico—have few options other than continuing to work with Washington and accommodate to its current policies in the region. But the region is already searching hard for alternatives, and will surely find them if the current US agenda for the Americas persists. By trying to impose its will on Mexico and the rest of Latin America, often in disagreeable, offensive ways, the Trump government is steadily losing its already paper thin credibility in the region.