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10:27, 25 November 2017 Saturday
Update: 12:09, 30 August 2017 Wednesday

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Trump and free trade: the NAFTA example
Trump and free trade: the NAFTA example

Ending NAFTA would see middle- and low-income Americans pay more to meet consumer needs

Prof. Tarık Oguzlu

Since the beginning of his presidential campaign last year, Donald Trump has been voicing highly critical views on the merits of the United States having multilateral free-trade agreements with other countries.

His decision to withdraw the signature of his country from the Trans-Pacific Partnership and his antipathy towards the Transatlantic Trade and Investment Partnership caused alarm bells across the globe to ring.

Many rushed to the conclusion that the U.S., the linchpin of the postwar-era liberal world order, no longer sees the maintenance of multilateral economic institutions and arrangements, of which global trade institutions and free-trade agreements stand out, as vital to the materialization of American political and economic interests.

Trump seems to have developed the idea that multilateral economic platforms and free-trade agreements with third parties have thus far served other countries more than they served the U.S., with the former having easy access to American domestic markets and capital investment at much cheaper prices than the markets would otherwise allow.

Similar to his vitriolic rhetoric on the free riding of European and East Asian allies on U.S. security commitments through multilateral and bilateral security arrangements, such as NATO in Europe and the so-called Hub-and-spokes system in East Asia, Trump has continuously made the argument that the adoption of protectionist trade measures and ‘America First’ economic policies would reverse the negative consequences of the globalization process and multilateral free trade policies on American economic interests.

This way, the U.S. would be more able to protect its internal market and help bring back manufacturing jobs and increase the wages at home. To Trump, the white working classes of the rust belt voted for him because this segment of the American society saw himself as the man whose protectionist and nativist economic and identity policies would revise the negative consequences of the globalized, open-border, multicultural and open market policies of the liberal Establishment.

In the eyes of the majority of people who voted for Trump, the U.S. is a white country that needs to be protected against the growing physical, social, economic and political salience of the non-white people.

It is against such a background that Trump’s opposition to the North Atlantic Free Trade Agreement (NAFTA) can be understood properly. This is the most important and voluminous free trade relationship that the U.S. has established with other countries to date.

Having entered into force in 1994, NAFTA has since established a free-trade area among the three countries of the North American continent, namely the United States, Canada and Mexico. The total volume of the economic activities of NAFTA members is around $20 trillion dollars, with the U.S. providing around $17 trillion alone. Canada is the second-largest trade partner of the U.S. after China, with an export-import value totaling nearly $580 billion. Mexico comes third among the U.S. trade partners with a trade volume of $550 billion.

Both Canada and Mexico have trade deficits with the U.S. in their favor; $11 billion and $63 billion respectively.

 

- 'Businessman approach'

The fact that the U.S. has been suffering from huge trade deficits with its neighbors to the north and south constitutes an important reason why Trump is vehemently opposed to NAFTA. In line with his transactional businessman approach, Trump sees trade deficits in zero-sum terms and strives to rectify them through all kinds of measures available to him.

One such measure was that, before he was elected to the White House, he voiced the view that, should he be elected president, he would terminate all unfair trade agreements with third parties, of which NAFTA attracted his ire most.

If his trade representative had not entered the fray at the last minute, he would have likely withdrawn the signature of his country from NAFTA in the first months of his presidency. What happened was that Trump, having been exposed to internal pressures as well as strong Canadian and Mexican lobbying efforts at multiple levels of authority inside the U.S., had to agree to a new set of consecutive talks to be held in the territories of three signatories with a view to updating NAFTA so as to make it more acceptable to the U.S.

The first round of the talks began on Aug. 16 in Washington D.C and ended on Aug. 20. The following rounds will convene in Canada and Mexico in September, and the parties hope to arrive at a final settlement by the end of this year before a presidential election is held in Mexico in summer 2018. The talks will be quite comprehensive and focus on such thorny issues as ‘rules of origin’, ‘mechanisms of dispute settlement’, and ‘non-tariff barriers’.

What matters for Canada and Mexico is that the U.S. is their number-one trading partner, with each exporting approximately 75 percent of their manufactured goods to the U.S. and enjoying unlimited access to American investment in their countries.

The textile, automobile, energy (in the case of Canada), petrochemical and agricultural sectors in Canada and Mexico thrive on the unrestricted exports to American markets within the framework of NAFTA. Canadians and Mexicans do not want to suffer from high export tariffs and other protective measures, such as quotas, that the U.S. could potentially employ in the absence of NAFTA regulations.

There is an ongoing debate regarding the pros and cons of the NAFTA regulations for the U.S. Space limitations do not allow us to delve into the details of these discussions. Yet, it would suffice to say that NAFTA symbolizes more than merely a transactional free-trade relationship among the three countries of the North American continent.

 

- United economies

NAFTA seems to have united the economies of these three countries into one single unit and improved the bargaining power of the North American bloc against European and East Asian economic blocs in the ongoing competition over global supply chains.

For example, for Mexican companies to produce industrial goods to export to the American markets, they need to buy American/Canadian inputs. For every $1-worth Mexican industrial output, approximately $0.60-worth American/Canadian input needs to be imported. Besides, the real reason why the rust-belt working classes have experienced no real increase in their wages and many of them ended up unemployed over the last 25 years since NAFTA entered into force was not the outsourcing of manufactured jobs to low-income countries but the technological advances and increasing automation in the manufacturing processes.

The termination of NAFTA will also negatively impact middle- and low-income Americans because they would have to pay more to meet their consumer needs in the markets.

It remains to be seen how the ongoing NAFTA talks will end, yet it would be a safe bet to argue that it will likely continue to exist despite Trump for its benefits for traditional Trump supporters seem to outweigh its potential costs.



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