MEXICO CITY — During his campaign, Donald Trump consistently railed against the North American Free Trade Agreement (NAFTA), calling it “the worst trade deal ever” and has promised to renegotiate it or withdraw completely to bring back “U.S. jobs” and investment from Mexico. But after the inauguration, how much leeway will a Trump administration have to fiddle with a treaty that’s been law for more than 20 years? And is it even a good idea for the U.S. economy?
NAFTA entered into force on Jan. 1, 1994 as a trilateral effort to promote regional investment and lift trade barriers among Canada, the United States and Mexico. It has since helped several industries and production chains become regionally integrated. Today, most of the Mexican manufactured goods that are exported to the United States contain 30-40% American-made parts.
Trade experts say it would be pretty easy for Trump to unilaterally wiggle out of NAFTA, even without approval from Congress. Article 2205 gives each country an exit clause, with six-months’ notice.
“Technically it’s extremely easy for one of the countries to withdraw from the treaty,” Chris Wilson, a trade expert at the Wilson Center think tank, told me.
But if Trump thinks that will bring jobs back, he might not understand the nature of NAFTA.
“Trade with Mexico supports just under 5 million jobs in the United States. These jobs would be on the line under a major shock like getting rid of NAFTA,” Wilson said.
“A Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.”
Renegotiating NAFTA would be a trickier proposal that would require the approval of Congress. However, as of now Republicans control Congress and the subcommittees overseeing trade. There’s also several Democrats, including Senate minority leader Chuck Schumer, who are opposed to NAFTA.
“A Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.”- NAFTA withdrawal clause
But it’s unclear whether a new version of NAFTA would be approved by the other two countries that are members of the trade deal.
So what is going to happen with NAFTA?
That’s the question that two Mexican trade experts looked at during a seminar last weekend. Beatriz Leycegui and Jaime Serra, who headed Mexico’s NAFTA-negotiating team in the ’90s, have outlined the complexities and pitfalls of trying to dismantle a North American integration process that’s more than two decades in the making.
“Trade competition is not only among countries, but between regions,” Serra explained. “We are not only selling each other products, we are producing them jointly.”
Beyond platitudes about “American jobs,” Trump’s specific concerns regarding NAFTA are unclear and he doesn’t seem to understand that U.S. consumers, companies and workers would actually suffer greatly if his future administration withdraws from the treaty, Serra says.
A U.S. pullout could deliver a severe blow to the agricultural sector. According to Serra and Leycegui, the U.S. imports 35% of all its fruits and 60% of all its vegetables from Mexico.
Some studies suggest that the overall effect of NAFTA on the entire U.S. economy is relatively small. However, it’s not just agriculture that would take a big hit. Entire supply chains would be put into jeopardy if Trump killed the treaty.
“NAFTA was instrumental in the integration of the North American auto industry, which experienced some of the most significant changes in trade following the agreement,” reads a 2015 Congressional Report. “U.S. auto parts producers may use inputs and components produced by another NAFTA partner to assemble parts, which are then shipped to another NAFTA country where they are assembled into a vehicle that is sold in any of the three NAFTA countries.”
“When we [Mexico] export, the U.S. exports.”- Jaime Serra
The Trump administration is reportedly evaluating the consequences of withdrawing from the treaty. But at this point, he’s already put the cart in front of the horse after campaigning aggressively against NAFTA in the Rust Belt states. Trump essentially issued a death sentence before the trial began, and now he’s going to have a hard time walking that back with the millions of voters who supported him because of his mostly uninformed claims that ending NAFTA would bring American jobs back.
If Trump pulls out, Canada and Mexico could remain in the treaty, negotiate or revive separate bilateral agreements, or resume commerce under World Trade Organization (WTO) rules. But analysts insist renegotiation would be the best scenario to satisfy all parties. Mexican President Enrique Peña Nieto recently said he would be willing to “modernize” NAFTA.
Leycegui says renegotiation would likely involve new tariffs, strengthening rules of origin for products, implementing new intellectual property rules, modifying the energy and petrochemical landscape, and pushing for stricter regulations on anti-dumping and countervailing duties, to name a few possible changes.
The former Mexican trade negotiator thinks the best option would be to update NAFTA through a series of “modernization side-agreements” to address labor, environment, anti-corruption treaties, currency manipulation, state-owned enterprises, and new trends such as e-commerce.
Renegotiation would also provide Canada and Mexico with an opportunity to bring their own concerns and requests back to the table. Leycegui said Mexico would most likely prioritize issues such as enhancing border infrastructure for transportation and easing restrictions on maritime transportation.
In any event, renegotiation wouldn’t happen overnight, or by Twitter fiat. Experts estimate the process of updating NAFTA could take a year if not longer, since the legislatures of each country would need to approve the amendments.
So Trump could kill NAFTA immediately, but the aftermath is plagued with uncertainty. “There’s no real precedent,” Leycegui told me. “The last time the U.S pulled out of a commercial treaty was in 1866.”
It would be Trump making good on his bravado, but it could be a Pyrrhic win for his government if it increased job-loss and hurt the U.S. economy in the process.