FDRA Footwear & Politics in Focus: NAFTA Under Trump

Transcription

1 FDRA Footwear & Politics in Focus: NAFTA Under Trump Overview of the legal mechanisms through which the US president can shape the country s international trade relations

2 Key elements of the North American Free Trade Agreement NAFTA timeline NAFTA is a free trade treaty between the United States, Canada and Mexico that went into effect on January 1994 and made the three countries the largest free market in the world NAFTA was created to eliminate tariff barriers to agricultural goods, manufacturing, and services; to remove investment restricjons; and to protect intellectual property rights Around 50% of tariffs were abolished immediately when the agreement took effect, and the remaining tariffs were gradually eliminated The agreement also opened the border and interior of Mexico to US truckers and streamlined border processing and licensing requirements for commercial ground transportajon The three NAFTA countries agreed to strengthen and standardize health, safety, and industrial standards NAFTA also created commissions with the power to impose fines against the signatory governments if they failed to implement the agreement s labor and environmental standards President Reagan proposes a North American agreement for free trade The US, Canada and Mexico begin trade regulajon talks NAFTA is officially signed IniJal NAFTA regulajons go into effect NAFTA free trade policies go into full effect Sources: Global Training Center, Inc., North American Free Trade Agreement (NAFTA), 2014.

3 Key effects of NAFTA in the United States Trade flows US trade with its NAFTA partners has more than tripled since the agreement took effect Most esjmates find that the deal led to an increase of less than 0.5% in US yearly GDP EsJmates have found that around 14 million American jobs rely on trade with Canada and Mexico The increase of trade acjvity has resulted in higher trade deficits for the US with both Canada and Mexico US exports to Mexico last year were up nearly 470% compared to 1993, the year before NAFTA became law US companies US manufacturing companies, especially automakers, gained an advantage from their new access to cheaper labor in Mexico AddiJonally, NAFTA leveled the playing field by eliminajng market access costs and allowing small firms to export to Mexico at the same cost as large firms Labor and environment The US has lost about a third of its manufacturing jobs since 1994, though the decline began before the NAFTA agreement was signed Several studies suggest that deeper trade liberalizalon puts downward pressure on wages for non- college educated workers Studies suggest that while about 15,000 net jobs are lost due to NAFTA each year, the US gains in higher produclvity and lower consumer prices American labor and environmental groups have lobbied for stronger regulatory standards in Mexico and Canada, claiming that lower standards in these countries are undercusng US industry Canada Since Canada and the US had already signed a trade agreement in 1988, NAFTA only deepened the already liberal trade Jes between the two countries Sources: Council on Foreign Rela9ons, NAFTA s economic impact, July 2016.

4 Key effects of NAFTA in Mexico Trade flows Around $1.4 billion in goods go back and forth across the US- Mexico border every day Most studies have found that NAFTA had a posijve impact on Mexican producjvity and consumer prices Mexico s stock of US FDI increased from $15 billion to more than $100 billion between 1993 and 2015 However, Mexico's economy grew at an average rate of just 1.3 percent a year between 1993 and 2013 a low rate compared to other large LaJn American countries at the Jme Mexican companies NAFTA gave a boost to Mexican farm exports to the United States, which have tripled since the deal s implementajon Hundreds of thousands of car manufacturing jobs have also been created in the country The industrial north of the country absorbed much of the gains from trade liberalizajon, with small agricultural workers in the south receiving fewer benefits Mexico s FDI stock and exports increased greatly under NAFTA, along with worker emigration Sources: Council on Foreign Rela9ons, NAFTA s economic impact, July 2016 Labor Mexican unemployment rose acer NAFTA, with some economists blaming the deal for exposing Mexican farmers to compejjon from heavily subsidized U.S. agriculture NAFTA did not lead to wage convergence between the US and Mexico, and the poverty rate remains at 1994 levels MigraAon Mexican migrajon to the United States, both legal and illegal, more than doubled acer 1994 and peaked in 2007 Some studies claim that NAFTA put almost 2 million small- scale Mexican farmers out of work, in turn driving illegal migrajon to the United States

5 Key effects of NAFTA in Canada Trade flows US and Mexican investments in Canada have tripled since 1993 US investment, which accounts for more than half of Canada s FDI stock, grew from $70 billion in 1993 to over $368 billion in 2013 Canadian companies Canadian agricultural trade with the United States more than tripled since 1994, as did Canada's total agriculture exports to NAFTA partners Labor Canada s parlcipalon in NAFTA did not negalvely impact the country s manufacturing sector, though it also did not reduce the produclvity gap between Canada and the United States Canada s labor produclvity is currently at 72% of US levels Prior trade deals NAFTA s impact on Canada, while significant, only deepened the trade flows that were first liberalized in the 1989 Canada- US Free Trade Agreement (CUSFTA) Background Extraneous factors in all three signatory countries have impacted their economic performance since 1993, making it difficult to isolate the effects of trade liberalizajon FluctuaJons in najonal currencies, domesjc polijcs and the 2008 financial crisis all had a considerable impact on trade across the NAFTA countries Canada opened its market to the US before NAFTA, and saw small gains after signing the trade deal Sources: Interna9onal Trade Administra9on, Florida- Trans Pacific Partnership report, October 2015;

6 The president can renegotiate or withdraw from NAFTA and similar FTAs without Congressional approval NAFTA exit provisions NAFTA Chapter 22 Chapter 22 of NAFTA allows its parjes to withdraw from the agreement acer giving six months nojce to the other member countries Trump, exercising the presidency s authority over foreign affairs, could unilaterally withdraw the United States from the agreement NAFTA ImplementaAon Act, SecAon 201 AddiJonally, SecJon 201 of the NAFTA ImplementaJon Act of 1993 allows the president to proclaim addijonal dujes if they are found necessary or appropriate to maintain the balance of reciprocal concessions between the US, Canada and Mexico The president would have to consult with Congress before invoking SecJon 201 to create new tariffs, but would not require Congressional approval PresidenAal trade proclamaaons US withdrawal from NAFTA would not automajcally raise US tariffs on imports from Canada and Mexico. Trump would have to issue an addijonal presidenjal proclamajon in order to bring back the pre- NAFTA Most Favored NaJon rates on Mexican and Canadian imports averaging around 3.5%, but with higher rates for specific items like clothing and footwear Analysis President Trump could also use withdrawal clauses similar to NAFTA s to withdraw the United States from other free trade agreements (FTAs) and the World Trade OrganizaJon (WTO) Sources: Jus9n Wolfers, Why a President Trump could start a trade war with ease, The New York Times, September 19, 2016; Marcus Noland, Clyde HuXauer, Sherman Robinson and Tyler Moran, Assessing trade agendas in the US presiden9al campaign, Peterson Ins9tute for Interna9onal Economics, September 19, 2016.

7 Trump has called for a withdrawal from NAFTA if a better deal cannot be negotiated Key Trump statements on NAFTA and trade policies Trump on NAFTA The President has called NAFTA "the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country He stated during his campaign that he would seek to negojate bemer terms with Mexico and Canada, with the opjon to withdraw from the pact if concessions aren t sajsfactory The NAFTA renegojajon is among the issues Trump pledged to address in the first 100 days of his administrajon Trump has proposed a 35% tariff on Mexican- assembled autos and other goods if the US withdraws from NAFTA AdministraAon prioriaes The NAFTA repeal is one element of a larger Trump administrajon trade agenda Among other priorijes are: ending TPP negojajons, stopping unfair imports, ending unfair trade pracjces and pursuing bilateral rather than muljlateral trade deals AddiJonally, Trump has threatened to impose a border tax on companies that move factories to other countries and send products back to the US NAFTA is logically is the first thing for us to deal with. That should be, and hopefully will be if I m confirmed, a very early topic in the administration." Wilbur Ross, Treasury Secretary Nominee Sources: Reuters, Trump s NAFTA revamp would require concessions, may borrow form TPP, November 22, 2016; Tal Kopan, Trump transi9on memo: trade reform begins day 1, CNN, November 16, 2016.; Reuters, Wilbur Ross: NAFTA is Trump s first trade priority, January 18, 2017.

8 Takeaways from Canada s and Mexico s statements on NAFTA Mexico Mexican President Enrique Peña Nieto has expressed his willingness to discuss NAFTA with Trump and "modernize" the treaty, though he is opposed to renegojajng exisjng provisions Peña Nieto pointed to new addijonal environmental and labor provisions as examples of potenjal addijons to the deal AddiJonally, any demands for concessions that would favor US industrial goods could be met with Mexican demands to increase US import quotas for Mexican sugar and protecjons for Mexico's potato crop Peña Nieto is scheduled to meet with Trump on January 31 Canada Canadian Prime Minister JusJn Trudeau has signaled that he is willing to engage in NAFTA discussions with a Trump administrajon Canada will likely insist that any renegojajon bring an end to the US dispute against Canadian exports of socwood lumber Joint disputes Mexico and Canada would likely demand greater access to compete for US public sector procurements, which are currently protected by "Buy America" laws They could also challenge the current framework for investor- state disputes under NAFTA, since both countries have lost cases against companies and had to pay millions of dollars in fines Both Mexico and Canada have signaled a willingness to reopen NAFTA talks Sources: Reuters, Trump s NAFTA revamp would require concessions, may borrow form TPP, November 22, 2016.

9 Three potential scenarios for NAFTA negotiations under Trump Trade restricaons Trump could repeal NAFTA and impose a tariff on Mexican goods. American companies with operajons and supply chains in Mexico would suffer from greater costs of business, which would likely result in layoffs. The price of consumer goods such as electronics and cars would go up for American consumers, and Mexico could respond with its own tariffs on American goods. The US would also lose a trade advantage as Canada and Mexico conjnue to engage in bilateral free trade. Strong renegoaaaon The Trump administrajon could reopen negojajons on NAFTA, leveraging US market access for greater concessions from Mexico and Canada. However, it is not yet clear what concessions Trump may demand from the other NAFTA signatory countries. Limited immediate impact Even if the US withdraws from NAFTA, Mexico may chose to accommodate exisjng supply chains and foreign investment and avoid responding with high tariffs. Trump s NAFTA renegotiations could spark a trade war, though embedded supply chains may lead to continuity Sources: Tami Luhby, Yes, President Trump really could kill NAFTA but it wouldn t be preby, CNN Money, July 6, 2016.