Trump Threatens to Pull Out of NAFTA

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What would happen if the United States pulled out of the North American Free Trade Agreement (NAFTA)?

We might be finding out soon. On Sunday, President Donald Trump took to Twitter to state that he is considering withdrawing from NAFTA:

“We are in the NAFTA (worst trade deal ever made) renegotiation process with Mexico & Canada. Both being very difficult, may have to terminate?”

During the 2016 campaign, Trump repeatedly vowed to pull out of the NAFTA agreement as part of his “America First” policy. He referred to the loss of jobs in the manufacturing sector as his motivation for terminating the deal. His protectionist approach attracted many to his bid for the presidency.

Earlier this year, President Trump stated that he had reconsidered withdrawing from NAFTA, saying that he is willing to renegotiate with Mexico and Canada. However, on Sunday, the president seemed to lean more towards pulling out of the agreement altogether. He has already shown that he is willing to abandon trade deals he believes to be detrimental to the United States. In one of his first acts as president, Trump withdrew the U.S. from the Trans-Pacific Partnership.

President Trump has engaged with Mexico and Canada in a five-day round of talks which ended last Sunday. According to Reuters, each country committed to pursuing “an accelerated process in revamping the agreement.”

So should the U.S. withdraw from NAFTA? There are compelling arguments on both sides of the issue. Many believe that the trade deal is not beneficial to the United States. The National Economics Editorial published a piece arguing for withdrawal. Among other reasons, they claim that millions of American workers have lost their jobs as a direct result of the agreement:

In 2015, America’s trade deficit was $736 billion, or 4% of our GDP.  Since GDP is simply the total output made by America’s working population, and since 4% of America’s GDP is imported, then it follows that 4% of America’s workers are displaced by these imports.

This means roughly 6 million workers are replaced by imports.

They also assert that free trade agreements like NAFTA increase the size of government. Since the deal has raised unemployment levels, more people “collect government welfare, be it subsidized housing, food stamps, or welfare checks.  Many collect disability (even though they’re not disabled) etc.”

According to the NEE, bigger government leads to higher taxes because “the people who benefit from offshoring end up paying more taxes to care for the millions of displaced workers.” However, it is not clear that higher taxes and unemployment can be directly linked to NAFTA. There are others who argue that automation is the largest contributor to the loss of manufacturing jobs in the United States.

The National Review published a piece arguing against withdrawing from NAFTA. They cite a study conducted by the Congressional Research Service written by M. Angeles Villarreal and Ian F. Fergusson. The study revealed:

NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters. The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP.

The author also states that the electronics and auto industries in the United States have grown larger. This growth has created “new business opportunities and jobs.”

If the United States pulls out of NAFTA, we will go back to the trade agreements that were in place previously. This would impose new tariffs on the goods we import from Canada and Mexico. According to The Washington Post, “New U.S. tariffs on imports from Canada and Mexico could increase to an average of 3.5 percent. For new trade barriers facing U.S. exporters, Canada’s import tariffs would increase to 4.2 percent and Mexico’s would increase to 7.5 percent.”

Increased tariffs would result in everyday Americans paying more for the products they buy. While some would argue that eliminating the agreement would increase wages, it is not known whether or not better wages would offset the higher prices.

So which side is right? It’s hard to say. Identifying NAFTA’s actual impact on jobs in America is quite a challenge. Some studies show that the agreement created jobs while others demonstrate that it has killed jobs. That being said, it appears that most economists tend to believe that the overall impact of NAFTA has been minimal; it hasn’t had as much of an effect as people think. Business Insider indicates that the number of jobs lost because of the deal is far less than it seems:

If you assume the worst about NAFTA, and assume (incorrectly, most economists would say) that the entirety of the U.S. trade deficit with Mexico is caused by NAFTA and that this trade deficit represents goods that should be made in the United States by American workers, “with that kind of calculation, you’d get something on the order of 150,000 jobs in U.S. manufacturing” lost due to the trade agreement, according to Robert Lawrence, professor of government at Harvard’s Kennedy School.

In the end, it might be a better idea to renegotiate the North American Free Trade Agreement. Perhaps this is why President Trump backed off on his vow to withdraw. The president touts himself as a master negotiator, so it is possible that his Sunday morning tweet was simply a way to gain leverage over Mexico and Canada. If he can hammer out a deal that benefits the United States, it could be a major accomplishment for his administration. And a significant boon for the U.S.