Brief History of NAFTA

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Written by Brennan Albrecht

Just this past week, President Donald Trump announced that the United States, Canada, and Mexico have reached a compromise on the long-promised NAFTA renegotiations. Although a step down from a total rebranding of NAFTA, as President Trump had promised on the campaign trail, there are several new aspects of the deal that experts from all three countries both cheer and lament [1]. It has been renamed, now the United States-Mexico-Canada Agreement (USMCA), which itself has been criticized for its difficulty to say[2]. Notwithstanding names and promises, NAFTA has been a favorite scapegoat for President Trump for a long time, and now he has the chance to wave it in the face of his critics and attempt to win over more support.

NAFTA was initially negotiated by President George H.W. Bush with Canada and Mexico in order to free up trade between the three countries. Canada and the US were largely interested in Mexico’s growing economy; they saw an opportunity to take advantage of Mexico’s cheaper labor and room for development as a way to get cheaper products in the northern countries and bolster Mexico’ poverty-ravished economy. In that regard, that certainly did happen, though not at the rate that many would have hoped. For the US, NAFTA improved regional exports and imports significantly increased, which has had a modest contribution to the US GDP (about 0.5% of the GDP every year), but many argue that the opening of Mexico moved thousands of jobs a year south of the border. One study (which has been backed up by others), claims that the US has lost on average 15,000 jobs a year to Mexico, although the decreased tariffs and cheaper labor bring in about $450,000 in lower prices than it would have. The US auto industry has been hit hardest, with about one-third of the sector moving to Mexico [3].

In that regard, Mexico was a clear winner in the old NAFTA, but it was not without problems. Mexican productivity and prices increased and decreased respectively, but the major concern of current Mexico is the lack of wage growth. Wages and poverty levels have only increased marginally since 1994, and due to the lack of protections for Mexican agricultural workers, many Mexican farmers have chosen to move to the US, where better ages awaited the same sort of work. Thus, Mexico’s hand in the renegotiations was largely centered on improving worker protections, which many agree did happen. Out of all three countries, many claimed that Canada, with its myriad of worker protections and room for growth, was the biggest winner of NAFTA. It saw the highest growth in GDP and US investment in Canadian industry. Because of that, it is unlikely that President Trump will renegotiate without placing larger requirements on Canadian industry [4].

President Trump’s largest qualm with NAFTA–a qualm which garnered him major support among the blue collar industry–was the noted and proven loss of jobs to foreign markets [5]. Some argued that NAFTA was the wrong target and that China was to blame, but the auto and steel industries certainly did see thousands of jobs move to Mexico. Mexico’s largest qualm was the lack of protection for workers. President Trump’s hostile dialogue towards the NAFTA countries sparked the desire to renegotiate among all countries. Canada in particular has been wary of renegotiation, largely due to NAFTA’s success in its economy. However, with President Trump’s strong-arm approach to trade, it is likely that Canada will join the renegotiation, and Mexico will come out with better protections, just as the US will [6].

 

 

Sources:

[1] “The renegotiation of NAFTA is a relief. But it is not a success.” The Economist. Oct 4, 2018. https://www.economist.com/leaders/2018/10/04/the-renegotiation-of-nafta-is-a-relief-but-it-is-not-a-success

[2] Gertz, Geoffrey. “5 things to know about USMCA, the new NAFTA” Brookings. Oct 2, 2018. https://www.brookings.edu/blog/up-front/2018/10/02/5-things-to-know-about-usmca-the-new-nafta/

[3] McBride, James and Mohammed Aly Sergie. “NAFTA’s Economic Impact” Council on Foreign Relations. Updated Oct 1, 2018. https://www.cfr.org/backgrounder/naftas-economic-impact

[4] McBride and Sergie. CFR. 2018.

[5] McBride and Sergie. CFR. 2018.

[6] Diamond, Liptak, and Newton. “US and Canada reach deal on NAFTA after talks go down to the wire” CNN. Oct 1, 2018. https://www.cnn.com/2018/09/30/politics/trump-nafta-canada/index.html

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