Dec 4, 2018

Why Trump’s Threat to Withdraw from NAFTA Would Be the True Disaster

Daniel Griswold Director of Trade and Immigration

Aboard Air Force One on his way back from the G-20 summit in Buenos Aires this weekend, President Trump renewed his threat to withdraw the United States from the almost 25-year-old North American Free Trade Agreement with Canada and Mexico. It’s a threat the president would be wise to reconsider.

President Trump has long been a critic of NAFTA. This fall his administration succeeded in renegotiating the agreement with Canada and Mexico, and last week he signed the re-named “US-Mexico-Canada Agreement” (USMCA) with his counterparts at the beginning of the G-20 meeting.

In an effort to prod Congress to approve the revised agreement, President Trump told reporters, “I will be formally terminating NAFTA shortly. …We (will) get rid of NAFTA. It’s been a disaster for the United States.” When Congress votes on USMCA (likely in early 2019, Trump said) it “will have a choice of the USMCA or pre-NAFTA, which worked very well.”

Far from being a “disaster,” NAFTA has been good for the US economy and good for American relations with our two closest neighbors. The massive job losses and outsourcing that the critics predicted never occurred. Some US industries contracted, such as textiles and apparel, but overall US manufacturing and total employment have continued to expand in the NAFTA era.

Since the agreement went into effect in 1994, the number of jobs in America has increased by a healthy 36 million, and the average real compensation per hour earned by US workers (wages and benefits adjusted for inflation) is up 28 percent. The number of manufacturing jobs has indeed fallen since NAFTA, but that trend began decades before the agreement went into effect. Real manufacturing output, meanwhile, is up 44 percent in the last 25 years. The strong economy today that President Trump claims credit for is strong in part because of NAFTA and other trade-expanding agreements.

Reverting to a “pre-NAFTA” state would be an odd preference for a president who has complained about what he calls unfairly high foreign trade barriers. Before NAFTA, Mexico’s average tariffs on imports from the United States were 12 percent, much higher than the five percent average US tariffs on imports from Mexico. Under NAFTA, duties in all three countries are zero on all non-agricultural products and zero on more than 97 percent of agricultural products.

If the United States were to simply withdraw from NAFTA, with no replacement agreement, the result would be higher duties all around, but the duties would be highest on US exports to Canada and Mexico. Without NAFTA, US duties on imports from our two neighbors would jump from virtually zero to an average of 2.3 percent on non-farm products and 3.8 percent on farm products. But duties imposed by Canada would jump to 2.3 percent and 12.4 percent, respectively, and those imposed by Mexico to 3.5 percent and 20.1 percent, respectively. Does President Trump really think it would be better if Mexican tariffs on US farm exports were 20 percent rather than zero percent under the current NAFTA? Try explaining that to American farmers.

Along with the economic harm a NAFTA withdrawal would impose, the president’s threat would be legally and constitutionally dubious. Article 1, Section 8 of the US Constitution gives Congress exclusive authority to impose duties and to “regulate commerce with foreign nations.” NAFTA came into force not through an executive order or a negotiated treaty, but only after Congress passed final implementing legislation in December 1993. Any effort by the administration to terminate the agreement without the consent of Congress would be quickly challenged in the courts.

The North American Free Trade Agreement stands as a major bipartisan achievement of US trade policy. It was the Republican administration of George H. W. Bush that negotiated and then signed the agreement with Canada and Mexico in December 1992. And it was the Democratic administration of Bill Clinton that worked with a majority of Republicans and a minority of Democrats in Congress one year later to successfully pass the implementing legislation.

The real disaster is not NAFTA, but the misguided threat from the current administration to undo all the good it has achieved. 

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