A Guide to Renegotiating NAFTA

June 19, 2017 6:00 AM

The North American Free Trade Agreement (NAFTA) has shaped the economies of the United States, Canada, and Mexico since 1994. President Trump’s plan to renegotiate NAFTA could profoundly affect US firms and workers. The Peterson Institute for International Economics supports a constructive approach to revising NAFTA in a series of papers and two conferences on “A Positive NAFTA Renegotiation" in the summer of 2017. Below is a special graphic feature on the basics of the agreement and proposed strategy for moving forward.

KEY FACTS ON NAFTA

Key Facts on NAFTA

MEXICO AND CANADA ARE AMONG THE UNITED STATES’ LARGEST TRADING PARTNERS

Canada and Mexico account for a quarter of total US trade (exports and imports) in goods and services.

Top US trading partners, 2016

THE US-MEXICO-CANADA ECONOMIES ARE TIED TOGETHER

Percent real GDP growth of NAFTA countries

MANY STATES RELY ON TRADE WITH CANADA AND MEXICO

Explore the interactive map below to see what percent of each state’s exports or imports is traded with NAFTA countries.

 

NAFTA STRENGTHENS SUPPLY CHAINS

Many US industries, especially automobiles, depend on either Mexico and/or Canada for components in their final products, strengthening their global competitiveness and lowering prices for consumers.

Parts or components used to produce final goods

TOP INDUSTRIES THAT DEPEND ON THE DEAL

US trade by key product groups

SOME JOBS WERE LOST, BUT THE ECONOMY EXPANDED WITH MANY JOBS

The US Labor Department reported that 414,000 workers were displaced between 1994 and 2002 because of NAFTA, less than 2 percent of the 31 million total job displacements during that time. Automation and other nontrade factors phased out many more jobs than trade. Tens of millions of jobs were added to the US economy in this period.5 The US economy grew significantly in the first decade after NAFTA with annual growth of 3.3 percent.6

WITHOUT NAFTA, US-MEXICO TRADE WOULD SUFFER

Ending NAFTA could subject US exports to Mexico to higher tariffs, hurting US firms, workers, and farmers, whereas tariffs on imports from Mexico could be raised by much smaller amounts. Tariff increases would disrupt critical North American supply chains of autos and other goods, raising production costs, undercutting the competitiveness of US companies, and hitting consumers with higher prices.

Potential change in average tariff rates if NAFTA ends

 

Moving Forward with NAFTA

WHAT NOT TO DO IN THE NEGOTIATION

Try to reduce trade deficits through managed trade with Mexico and Canada

  • WHY? Trade agreements do not affect the overall US trade deficit. Managed trade creates inefficiencies and raises prices, hampering potential growth.

Revise rules of origin to require more content from US factories

  • WHY? Could lead to lower regional content in final goods if importers forgo NAFTA preferences because compliance costs are higher than trading under most favored nation tariffs.

Attempt to “level the playing field on tax treatment”

  • WHY? Potentially raises the cost of US imports and possibly violates US obligations under NAFTA and the World Trade Organization.

Promote “Buy America” policies

  • WHY? Raises costs of US government purchases and can delay infrastructure projects; Canada and Mexico will follow suit and restrict ability of US firms to bid on their government contracts.

Notes

1. US two-way goods and services trade. Jeffrey J. Schott and Cathleen Cimino-Isaacs, “Updating the North American Free Trade Agreement,” in A Path Forward for NAFTA, forthcoming.

2. Foreign direct investment stock, 2015. US Bureau of Economic Analysis.

3. By total goods and services trade. BOP basis, seasonally adjusted. Census Bureau and Bureau of Economic Analysis, Exhibit 20, “International Trade in Goods and Services April 2017.”

4. Share of US trade in intermediate inputs. Mary Amiti, Caroline Freund, and Tyler Bodine-Smith, "Why Renegotiating NAFTA Could Disrupt Supply Chains."

5. US Bureau of Labor Statistics.

6. Gary Clyde Hufbauer and Jeffrey J. Schott, “Correcting the Record on NAFTA.”

7. By value. Mary Amiti and Caroline Freund, “US Exporters Could Face High Tariffs without NAFTA.”

8. Caroline Freund, Streamlining Rules of Origin in NAFTA.

Comments

Francisco Horneffer

Excellent report

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