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Donald Trump has put “renegotiating” the two-decades-old North American Free Trade Agreement between the US, Canada and Mexico at the top of his economic agenda and threatened to pull out of the deal if the US does not get what it wants. But how might he do that and what would it mean for business?
Here are five points to keep in mind.
1. The economic stakes are enormous Nafta went into effect on January 1, 1994. Since then trade between the three countries has exploded largely as a result of the birth of what are now continental supply chains. US trade with Canada and Mexico now amounts to more than $1tn annually and made up almost 30 per cent of its trade with the world in the first 11 months of 2016. That was twice the US’s trade with China and 10 times its trade with the UK. For many companies, the US pulling out of Nafta would mean having to unwind long-term investments. It would also mean losing access to cheap labour in Mexico, which many executives see as vital to their ability to compete against China and other low-cost producers. “Nafta is the linchpin of our current economic competitiveness,” Frederick Smith, the chief executive officer of FedEx, declared last month. It also could have a huge effect on some of the states that were key to Mr Trump’s election victory as many US auto parts makers export to both Canada and Mexico. In a report this month the Center for Automotive Research pointed out that the Detroit metropolitan area exported more than $17bn worth of goods to Mexico and a further $15bn to Canada in 2015. Together those two countries accounted for almost three-quarters of the area’s exports.
2. Everyone agrees Nafta is in need of an update Mr Trump is not the first American president to call for the renegotiation of Nafta, or to see it as politically toxic. Barack Obama vowed during his 2008 campaign to renegotiate Nafta to update its labour and environmental standards. His administration argued that it delivered on that promise with its negotiation of the 12-country Trans-Pacific Partnership, which includes Canada and Mexico. Mr Trump killed that larger deal on Monday by signing an executive order to pull out of the TPP. But in a strange way the Obama administration may have already laid the groundwork for a renegotiation of Nafta. During his confirmation hearing last week, Mr Trump’s pick for Treasury secretary, Stephen Mnuchin, acknowledged as much. “I would hope that the starting point is the work that you've done,” he told one TPP backer.
3. A ‘border tax’ is a threat that could be hard to deliver on Mr Trump has threatened repeatedly to impose a “border tax” of 35 per cent on companies that locate factories in Mexico rather than the US. “If that happens, we are going to be imposing a very major border tax on the products when it comes in,” he told a group of US CEOs on Monday. Doing that would violate the terms of Nafta and the US’s commitments as a member of the World Trade Organisation. Mr Trump’s own cabinet nominees have also expressed scepticism. “I don't think that it’s a plan that's going into action,” Mr Mnuchin told senators. Delivering on the threat could be difficult politically for Mr Trump, particularly as he manages his relationship with Republicans in Congress. Congress jealously guards its constitutional powers on trade and some Republicans, including House Speaker Paul Ryan, have already made clear they would oppose new tariffs. Andrew Liveris, Dow Chemical chief executive, said the idea was discussed “quite a bit” at Monday’s White House meeting. But he had left with the impression that Mr Trump was “not going to do anything to harm competitiveness,” he told reporters afterwards.
4. US demands are likely to focus on tax, disputes and ‘rules of origin’ With most of the Trump cabinet still awaiting Senate confirmation, the US’s exact goals for renegotiating Nafta remain unclear. They are also likely to change as industries press their own interests over what Mr Trump has said is likely to be an 18-month process. But in a paper last year, Wilbur Ross, the incoming commerce secretary, and economist Peter Navarro, who heads a new White House National Trade Council, nominated Mexico’s use of a VAT deductible for exporters as one area of concern. “Mexico has shrewdly exploited the VAT backdoor tariff to further its competitive advantage,” they wrote, pointing to the fact Mexico’s VAT has increased from 10 per cent to 16 per cent since Nafta took effect. “This discourages US exports to Mexico, encourages US manufacturers to offshore to Mexico, and has helped to increase our annual trade deficit in goods with Mexico . . . This is yet another case in which corporate America wins, but Mr and Ms America lose.” Incoming officials have grumbled about the tripartite dispute settlement system that now polices Nafta disagreements. They also have complained about the “rules of origin”, which determine how much of a product has to be made inside Nafta’s borders to qualify for its benefits. That is of particular importance to the auto sector and to US parts makers, which in many cases rely on those rules to beat out Chinese and other competitors.
5. Mexico has the weakest hand of the countries at the Nafta negotiating table The precursor to Nafta was a 1987 bilateral agreement between the US and Canada, which remains the US’s top export market. That means that, should Mr Trump rip up Nafta, Mexico could find itself in the most precarious position of the three signatories. The US also has a trade surplus with Canada in goods and services. “We buy more goods from the United States than we send,” says Peter Mackay, a former Canadian foreign minister now at Baker McKenzie, the law firm. Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, says the 1987 deal could be one of the building blocks of a successor to Nafta should the latter collapse. Much of the US legislation passed to comply with Nafta would also remain in place unless Congress acted to repeal it, Mr Hufbauer points out. “This is a president of symbols,” he says. “But we have to distinguish between the symbol and the substance. What Trump needs for his base and to answer his political promises is to get rid of this five-lettered name [Nafta].
Good piece. So will U.S. consumers be OK with paying more for cars if much better-paid American autoworkers make them? What happens to migration flows from Mexico if these jobs are displaced? Not sure you can ever build an iron-tight wall across a frontier that long. Also what happens to the $15B worth of American auto exports to Mexico if they lose out in a renegotiation?
Donald Trump has put “renegotiating” the two-decades-old North American Free Trade Agreement between the US, Canada and Mexico at the top of his economic agenda and threatened to pull out of the deal if the US does not get what it wants. But how might he do that and what would it mean for business?
Here are five points to keep in mind.
1. The economic stakes are enormous Nafta went into effect on January 1, 1994. Since then trade between the three countries has exploded largely as a result of the birth of what are now continental supply chains. US trade with Canada and Mexico now amounts to more than $1tn annually and made up almost 30 per cent of its trade with the world in the first 11 months of 2016. That was twice the US’s trade with China and 10 times its trade with the UK. For many companies, the US pulling out of Nafta would mean having to unwind long-term investments. It would also mean losing access to cheap labour in Mexico, which many executives see as vital to their ability to compete against China and other low-cost producers. “Nafta is the linchpin of our current economic competitiveness,” Frederick Smith, the chief executive officer of FedEx, declared last month. It also could have a huge effect on some of the states that were key to Mr Trump’s election victory as many US auto parts makers export to both Canada and Mexico. In a report this month the Center for Automotive Research pointed out that the Detroit metropolitan area exported more than $17bn worth of goods to Mexico and a further $15bn to Canada in 2015. Together those two countries accounted for almost three-quarters of the area’s exports.
2. Everyone agrees Nafta is in need of an update Mr Trump is not the first American president to call for the renegotiation of Nafta, or to see it as politically toxic. Barack Obama vowed during his 2008 campaign to renegotiate Nafta to update its labour and environmental standards. His administration argued that it delivered on that promise with its negotiation of the 12-country Trans-Pacific Partnership, which includes Canada and Mexico. Mr Trump killed that larger deal on Monday by signing an executive order to pull out of the TPP. But in a strange way the Obama administration may have already laid the groundwork for a renegotiation of Nafta. During his confirmation hearing last week, Mr Trump’s pick for Treasury secretary, Stephen Mnuchin, acknowledged as much. “I would hope that the starting point is the work that you've done,” he told one TPP backer.
3. A ‘border tax’ is a threat that could be hard to deliver on Mr Trump has threatened repeatedly to impose a “border tax” of 35 per cent on companies that locate factories in Mexico rather than the US. “If that happens, we are going to be imposing a very major border tax on the products when it comes in,” he told a group of US CEOs on Monday. Doing that would violate the terms of Nafta and the US’s commitments as a member of the World Trade Organisation. Mr Trump’s own cabinet nominees have also expressed scepticism. “I don't think that it’s a plan that's going into action,” Mr Mnuchin told senators. Delivering on the threat could be difficult politically for Mr Trump, particularly as he manages his relationship with Republicans in Congress. Congress jealously guards its constitutional powers on trade and some Republicans, including House Speaker Paul Ryan, have already made clear they would oppose new tariffs. Andrew Liveris, Dow Chemical chief executive, said the idea was discussed “quite a bit” at Monday’s White House meeting. But he had left with the impression that Mr Trump was “not going to do anything to harm competitiveness,” he told reporters afterwards.
4. US demands are likely to focus on tax, disputes and ‘rules of origin’ With most of the Trump cabinet still awaiting Senate confirmation, the US’s exact goals for renegotiating Nafta remain unclear. They are also likely to change as industries press their own interests over what Mr Trump has said is likely to be an 18-month process. But in a paper last year, Wilbur Ross, the incoming commerce secretary, and economist Peter Navarro, who heads a new White House National Trade Council, nominated Mexico’s use of a VAT deductible for exporters as one area of concern. “Mexico has shrewdly exploited the VAT backdoor tariff to further its competitive advantage,” they wrote, pointing to the fact Mexico’s VAT has increased from 10 per cent to 16 per cent since Nafta took effect. “This discourages US exports to Mexico, encourages US manufacturers to offshore to Mexico, and has helped to increase our annual trade deficit in goods with Mexico . . . This is yet another case in which corporate America wins, but Mr and Ms America lose.” Incoming officials have grumbled about the tripartite dispute settlement system that now polices Nafta disagreements. They also have complained about the “rules of origin”, which determine how much of a product has to be made inside Nafta’s borders to qualify for its benefits. That is of particular importance to the auto sector and to US parts makers, which in many cases rely on those rules to beat out Chinese and other competitors.
5. Mexico has the weakest hand of the countries at the Nafta negotiating table The precursor to Nafta was a 1987 bilateral agreement between the US and Canada, which remains the US’s top export market. That means that, should Mr Trump rip up Nafta, Mexico could find itself in the most precarious position of the three signatories. The US also has a trade surplus with Canada in goods and services. “We buy more goods from the United States than we send,” says Peter Mackay, a former Canadian foreign minister now at Baker McKenzie, the law firm. Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, says the 1987 deal could be one of the building blocks of a successor to Nafta should the latter collapse. Much of the US legislation passed to comply with Nafta would also remain in place unless Congress acted to repeal it, Mr Hufbauer points out. “This is a president of symbols,” he says. “But we have to distinguish between the symbol and the substance. What Trump needs for his base and to answer his political promises is to get rid of this five-lettered name [Nafta].
Good piece. So will U.S. consumers be OK with paying more for cars if much better-paid American autoworkers make them? What happens to migration flows from Mexico if these jobs are displaced? Not sure you can ever build an iron-tight wall across a frontier that long. Also what happens to the $15B worth of American auto exports to Mexico if they lose out in a renegotiation?