Will NAFTA Go Away?

If so, what are the implications?
While on the campaign trail, Trump repeatedly singled out NAFTA – the North American Free Trade Agreement – as being one of the worst deals for Americans that he’s ever seen.

Blasting former President Bill Clinton, Trump said, “[Clinton] approved NAFTA, which is the single worst trade deal ever approved in this country," adding "NAFTA was one of the worst things that ever happened to the manufacturing industry and the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country."

Is Trump right? Or was it just campaign rhetoric? The answer, like most things, is complicated and depends on who ask. Nevertheless, the reality is that Trump can pull the United States out of NAFTA by simply giving Canada and Mexico 6 months-notice. Let’s examine the implications.

Background

The North American Free Trade Agreement sets the rules of trade and investment between the US, Canada, and Mexico. It was envisioned by President Ronald Regan and the concept was simple: reduce trading costs, increase business investment, and help North America be more competitive in the global marketplace.

NAFTA was signed by President George H.W. Bush, Mexican President Salinas, and Canadian Prime Minister Brian Mulroney in 1992. It was ratified by the legislatures of the three countries in 1993, including the US House of Representatives on November 17, 1993, the US Senate on November 20, 1993 and finally signed into law by President Bill Clinton on December 8, 1993. It went into effect on January 1, 1994.

Since NAFTA took effect, it has eliminated most tariff and non-tariff barriers to free trade and investment between the three NAFTA countries. But has it been successful? Depends on who you ask.

It’s Been A Bust – By The Numbers

Public Citizen published a Report that depicts NAFTA as an absolute failure. Among the “findings” from the Report:

  • A staggering $181 billion U.S. trade deficit with Mexico and Canada
  • Loss of 1 million net U.S. jobs
  • Displacement of more than 1 million Mexican campesino farmers
  • A doubling of immigration from Mexico

It’s Been A Boon – By The Numbers

NAFTANOW.org depicts NAFTA as an absolute success and “reports” the following:

  • Trade among the NAFTA countries has more than tripled, reaching US $949.1 billion
  • Across North America, total employment has grown by almost 40 million jobs since 1993
  • U.S. manufacturing output rose by 62% between 1993 and 2008, compared with 42% between 1980 and 1993
  • In 2008, U.S. manufacturing exports reached an all-time high of US $1.0 trillion

So, What Does This All Mean?

So, depending on who you believe, NAFTA has either been a complete failure or a great success. The truth is probably somewhere in the middle. But most would agree that if the US were to withdraw, it would get messy.
First, it would hurt American companies – think GM and Coca-Cola – that manufacture parts in Mexico and ship them back to the US. Among the most popular imports are auto parts, flat-screen televisions, telephones and refrigerators.
Second, it would require lots of American companies to bring segments of their supply chains back to the US to avoid tariffs or penalties — a process that takes time and money. And you can be sure that these costs would be passed along to consumers.
Next, withdrawing from NAFTA would hurt sales of American products in Mexico, which is actually America's second largest market for exported goods at about $214 billion last year. Among the top exports are machinery, vehicles and plastics.
Finally, the US withdrawal from NAFTA could set off a trade war with Mexico, which could in turn cause a downturn in the US economy, a decline in stock markets and a spike in the currently low US unemployment rate.

Or maybe not.

Regardless of how it exactly plays out, it's not likely that withdrawing from NAFTA will do much to help American workers, which is exactly what Trump rallied for during the campaign. In theory, some of those jobs could come back to America, but higher US labor costs would then weigh on profits of U.S. companies.
So, in the end, it seems to come down to this: if NAFTA stays, we might have cheaper goods but fewer manufacturing jobs; if NAFTA goes, we might have more manufacturing jobs but more expensive goods. Which is less bad for the US?

As your financial advisor, I don’t know the answer to that question. I do note, however, that the Mexican peso has lost 20% of its value since Trump was elected back in November. So, if the currency markets really are efficient, it would appear that the “markets” think the prospect of the US walking away from NAFTA would be much worse for Mexico. But then again, that could be due to Trump’s promise to build a wall.

See how complicated this gets? That’s why I preach diversification…

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