NS4540 Winter Term 2018 NAFTA Scenarios

1. NS4540Winter Term 2018NAFTA Scenarios

2. Overview I • NAFTA adopted in January 1994 eliminated most trade barriers between U.S., Canada and Mexico. • President Trump has called NAFTA – “the worst trade deal in history.” • North American economic integration underway long before NAFTA • Built on series of earlier efforts to lower trade barriers • Each country had its own goals for NAFTA • Mexico • Way for President Salinas to lock in reforms started by President de la Madrid in mid-1980s • Transition of top-down statist economic to market capitalism • Attract foreign investment to spur catch-up growth in under-performing economy

3. Overview II • For United States NAFTA represented • Opportunity to expand exports and • Establish better relations with Mexico • Prior to NAFTA Mexico had high tariffs and barriers to U.S. investment • More jobs in Mexico would mean less migration to the U.S. • Canada objectives less ambitious • Did not want to be left out • Forge a more durable commercial relationship with Mexico and concessions from U.S.

4. Supporter Arguments I • NAFTA friends and foes stress entirely different metrices in analyzing the pact • Supporters – which include most economists • Gauge success by how much trade it induces • By this yardstick, NAFTA a huge success • U.S. trade with Mexico not about twice as large as might have been the case • By 2016 Canada and Mexico first and second largest markets for U.S. exports • Ranked just behind China for imports • NAFTA partners account for about a quarter of total US imports and Exports in 2016

5. Supporter Arguments II

6. Supporter Arguments III • Biggest achievement in investment • Increase of Canadian and Mexican FDI in the United States to $388 billion in 2016 from $42 billion in 1993 • Trade and FDI linked in regional supply chains for unfinished goods – especially between Mexico and U.S. • 40% of U.S. imports from Mexico and • 75% of exports to Mexico • Consist of such intermediate inputs • Large part of this trade takes place within firms • Ford firms import dashboards from Mexico as they export transmissions to Ford plants in Mexico

7. Supporter Arguments IV • Total U.S. trade with NAFTA partners increased by 49.5% from 2003-2017 • Over same period U.S. GDP increased by 25.5% • If trade had been proportional to growth without NAFTA, trade with NAFTA an extra $191 billion annually • Anticipating critics, supporters contend that U.S. is bound to run overall trade deficit because of low U.S. savings • Trade agreements may change this a little, but not significantly

8. Supporter Arguments V • U.S. bilateral trade deficit has grown • Going from a surplus of $4 billion in 1993 to • Deficit of $58 billion • Not a “giveaway” by trade negotiators • At time NAFTA became law average tariff on imports from Mexico was 4.3% • Average Mexican tariff on imports from U.S. was 12.4% • Since both tariff averages went to zero the “loser” as measured by tariff concessions was Mexico • Also need to look at context • From 1993 to 2016 the U.S. goods and services deficit with the world (excluding petroleum) expanded from $121 billion to $952 billion • Mexico’s contribution was only around 13%

9. Opponents Arguments I • NAFTA opponents stress – especially manufacturing in industries that compete with Mexico and • Suppression of U.S. wages • Lost jobs • 52,000 Americans applied for aid under NAFTA’s trade adjustment assistance program for workers displaced between 1994 and 2002 • However • Amounted to about 2% of total U.S. job displacements which averaged about 3 million per year • First decade of NAFTA U.S. economy grew at 3.3% per year with generally low unemployment

10. Opponents Arguments II • Over last decade 707,000 jobs displaced, but 35 million workers change employment in an average year. • For each of the 707,000 jobs displaced gains to U.S. economy in productivity and lower priced goods amounted to $270,000. • Reduced Wages • Charge is that NAFTA helps U.S. firms contain pace of wage gains -- seems straight-forward • Current average manufacturing wage in Mexico is $4.50 per hour vs $19.50 in US • For autos $7.79 vs $37.38

11. Opponents Arguments III • Reality more complicated • Rigorous studies have found imports from Mexico and Central America had no significant effect on overall U.S. wages in manufacturing • In states that trade the most with Mexico wages went up faster in than in states with less trade. • Political impacts • Supporters emphasize the creation of new foundation for U.S. Mexican relations • Prior relations cool at best. • Opponents claim NAFTA steeling American dream

12. Opponents Arguments IV • On the plus side the two countries have collaborated on financial matters and the war on drugs • Why did Trump’s characterization of NAFTA as a “total Disaster” resonate so well with voters? • Can’t find explanation in opinion polls • In 2017 polls indicated 51% felt the U.S. was better off with the pact and that it was a good thing.

13. Opponents Arguments V • One explanation, three broad trends in last decade • First, wages of American men who did not attend college stagnated • Second, demand for blue collar labor fell with the manufacturing work force declining from 14 million in 2006 to 12 million a decade later and • Third, after a pause in the middle of the decade for the financial crash, share of household income going to the top 1% resumed its clime reaching 21% in 2016 • Meanwhile the U.S. trade deficit, concentrated in manufacturing goods hovered around 3% of GDP and totaled a half-trillion dollars in the year of the election.

14. Trump Demands I • Candidate Trump linked these trends to U.S. trade policy • Spurious connections, but played well with blue collar frustration in Midwest swing states • Normally diplomats should be able to renegotiate NAFTA with some “modernization” themes such as: • New rules for state-owned enterprises and digital trade • Tougher chapters on labor and environmental obligations. • However Trump administration has other demands that will not be easy for Canada and Mexico to accept

15. Trump Demands II • First, bilateral trade in goods should be “balanced” implying that Mexico should unilaterally reduce merchandise trade surplus with U.S. -- economically makes little sense. • Second, tighter rules of origin should be imposed – tougher limits on portion of inputs made outside North America that could be included in a product to quality for lower tariffs – (video) may actually result in less value added • Third Canada and Mexico should open federal, state and government procurement to U.S. firms with no comparable opening imposed on U.S. federal and state governments – why would they agree to this? • Several other one-way concessions to be made by Mexico and Canada -- arbitration

16. Scenarios I • Four possible outcomes: • 1. Capitulation by U.S. partners – Canada and Mexico might cave – very unlikely especially since Lopez Obrador may win next election. Actually, highly unlikely any Mexican president would do this. • 2. Capitulation by U.S. – Trump backs off and concentrates on “modernizing” NAFTA – diplomatic solution above. Highly unlikely given Trump’s past rhetoric. • 3. Teremination – Trump has threatened to withdraw if Canada and Mexico do not meet his demands. Unlikely given economic costs to US

17. Scenarios II • 4. Muddle-Through – Mexico and Canada offer concessions that would not only please trump, but also serve their broad economic interests. Examples -- • Larger purchases of natural gas by Mexico • Fewer restrictions on dairy products by Canada • By combining such concessions with modernization themes, U.S. negotiators could declare victory • Not a scenario that would satisfy anyone, but by far the most likely outcome.