One of President Trump’s top priorities is to rework trade deals so that they are fair to the U.S. But, what if leaders cannot reach an agreement and NAFTA ends altogether?
Published by Transport Topics, Connor D. Wolf |
The North American Free Trade Agreement became a critical component in the national economy when it was implemented in 1994. The trade deal is now facing major changes as partner countries rework its many provisions – a process that has been marred by contentious negotiations and a possible pullout by the United States.
President Trump entering office became the catalyst for the renewed trade talks. He has been highly critical of current trade agreements like NAFTA which he sees as undercutting domestic workers. Industry groups generally agree that the deal should be updated, but have become increasingly worried about the direction talks are going.
“Compared to when we started I have to say I’m a bit more pessimistic,” American Trucking Associations chief economist Bob Costello told InsideSources. “I thought it was a great idea to update NAFTA. I think everyone was under the impression that it would be a lot easier than it’s been, and therefore I think reality has set in and we’re probably a little bit more pessimistic. But by the same token, I don’t think it’s all done either.”
The fifth round of negotiations in Mexico City, Mexico, ended with lingering tensions when they closed Nov. 21. The next round of negotiations is scheduled to begin Jan. 23 in Montreal, Canada.
NAFTA has been a major point of contention since it was first implemented over two decades ago. Critics have argued the trade deal has benefited large corporations or foreign workers at the expense of domestic workers. But to industry groups, the trade deal has been vastly more beneficial than not.
“From our perspective, NAFTA has been a win-win,” David French, senior vice president for government relations at the National Retail Federation, told InsideSources. “It has been very successful agreement by most measures. The flaws in the agreement can be fixed by negotiating. You’re not going to get the best agreement by threatening to pull out.”
NAFTA was negotiated as a free trade agreement between the United States, Canada, and Mexico. The agreement reduced or eliminated tariffs and other trade restrictions to open up more access among the partner countries. It was able to increase trade dramatically in the region.
“The vast majority of products that go over the southern border and the northern border involve trucks,” Costello said. “That’s generated $6.5 billion in revenue annually for our industry, and that means we’re employing over 46,000 people who’s jobs sorely depend on NAFTA, including over 31,000 U.S. truck drivers.”
President Trump hopes to use trade and other reforms to encourage domestic production – which could result in more jobs. But some domestic production faces barriers that other countries don’t have. Restricting foreign trade in certain circumstances could hurt both domestic companies and consumers by limiting the flow of goods they might rely on.
Mexico, for instance, is the only place in the world that can grow avocados year round. The country, as a result, supplies 45% of the global avocado market. Texas A&M University found in 2015 that avocado imports have helped to create roughly 19,000 domestic jobs along with $600 million in tax revenue.
“We really want no changes, no changes to trade,” Ramón Paz, strategic advisor at The Avocado Producers and Exporting Packers Association of Mexico, told InsideSources. “If we go back before NAFTA, we had a tariff of about six cents per pound. If they reapply that tariff it would have a cost throughout the supply chain. There would be changes for the growers and the shippers and everyone. But in the end, the most affected party would be the consumers.”
Industry groups and companies elsewhere have also been vocal in expressing their concerns and hopes throughout the renegotiation process. About a hundred companies urged federal officials in a letter Nov. 14 not to make major changes to trucking provisions. Food and agriculture groups also sent a letter Oct. 25 warning that withdrawing would cause significant problems for their industries.
Industry groups have been particularly concerned about the rhetoric coming out of the administration. The president has also proposed several contentions proposals which partner countries are unlikely to agree with. U.S. Chamber of Commerce President Tom Donohue called some ideas “poison pill proposals” which threaten to undermine talks.
“We’re hopeful but some of the rhetoric out of the administration hasn’t been helpful,” French said. “We’re hopeful the administration is just playing a game to achieve maximum leverage in the agreement but is ultimately interested in constructing a solution rather than tearing the agreement apart.”
U.S. Trade Ambassador Robert Lighthizer detailed during a congressional hearing June 22 that the administration plans to renegotiate trade deals to be fairer and more efficient, enforce trade deals more aggressively, and increase domestic exports. Those goals have been consistent talking points as the administration has discussed trade.
The disagreements and heated rhetoric have fueled concern throughout the economy. Many businesses rely on the massive trade deal which makes them vulnerable depending on how the negotiations end – while creating uncertainty in the process. Alliance of Automobile Manufacturers federal affairs vice president Jennifer Thomas notes that there are two bad outcomes that could potentially come from these talks.
“It’s hard to see how we end up in a good place at this point,” Thomas said. “At this point, we’ve been envisioning two scenarios. One where we’re looking at an unworkable NAFTA because we have an erroneous rule of origin that we’re having to meet, or that there is no NAFTA.”
Trump has said he is trying to make a better trade deal but is willing to pull out if not possible. Investment bank Goldman Sachs announced late last year that it expects the administration to ultimately withdraw from the trade deal. Industry groups warn that there would be immediate economic harm if the administration does decide to step away.
“We’re growing more concerned by the prospects of the administration using the treat of a withdrawn as leverage in the negotiations,” Thomas said. “And I think that if the president were to trigger a withdraw, there would be immediate ramifications. It’s hard to see how we could pick of the pieces at that point.”
Thomas adds withdrawing could undermine other achievements like tax reform which helps the business community. She also notes that withdrawing could create a lot of uncertainty across many industries. Costello warns that it would be disastrous for the trucking industry – which plays a critical role in trade.
“The NAFTA renegotiations are critical for our industry,” Costello said. “If it were to go south and we pullout, it would be disastrous for us. We obviously have a big stake in it and as a result, I’ve been following it closely.”
The American Action Forum, a center-right nonprofit, released a report Dec. 11 claiming that withdrawing from the trade deal could jeopardize 14 million jobs. The report also found that withdrawing could expose businesses to $15.5 billion in new tariffs and increase consumer costs by at least $7 billion.
The NAFTA negotiations are still ongoing so there is still hope for the business community. Reuters found in a survey Jan. 19 that the majority of economists expect the U.S. to stay in the deal – but there is still the issue of what the finalized reworked deal will look like. Industry groups are generally open to updating the trade deal – but are concerned over what the outcome will be.
“I think that we’re concerned about the direction that administration seems to be taking the talks,” French said. “I think that everyone agrees with the goal of modernizing the agreement. But too many times in the last several months the White House has suggested that maybe the outcome will be to pullout of the agreement, and that’s not a constructive approach.”
The national economy has changed in dramatic ways since the trade deal was first implemented. Technology, like new forms of communication, have shifted markets and opened up new avenues for international trade. The internet, for instance, has provided a whole new way to shop and conduct business.
“We went into this process thinking it was just going to be a modernization of NAFTA,” Thomas said. “We realized that this was going to be more than that and then we saw the contentious proposals that were tabled in the fourth round. Our industry [automobile manufacturers] really feels like we’re in the crosshairs at this point.”
Costello points to a cross-border trucking program that could be in jeopardy as the talks progress. The federal program allows Mexican truck drivers to make long-haul deliveries in the United States. The program is intended to reduce contentious interactions at the border – but it has also faced opposition.
“We’ve been supportive of the Mexican truck program,” Costello said. “It’s now an open door policy for all Mexican truck drivers to come across the border. But it is good and has the potential to be better. It’s a relief valve to clear congestion at the border.”
Trump was also able to upend another major trade deal before it was fully implemented by withdrawing from the Trans-Pacific Partnership (TPP). The agreement would have been the largest regional trade deal in history at roughly 39% of global GDP.