Life After NAFTA

By Veronique de Rugy

August 30, 2018 6 min read

On Monday, the American people were treated to a televised Oval Office phone call between President Trump and Enrique Pena Nieto, the president of Mexico, during which they congratulated each other on reaching a bilateral trade agreement. The new deal is meant to replace the North American Free Trade Agreement, yet we now have more questions than answers. Only one thing is clear: If the agreement ever sees the light of day, it will likely be called the United States-Mexico Trade Agreement.

As the president explained: "(T)hey used to call it NAFTA. We're going to call it the United States-Mexico Trade Agreement, and we'll get rid of the name NAFTA. It has a bad connotation because the United States was hurt very badly by NAFTA." But if you know anything about NAFTA, you may be left wondering what was so bad about it. After all, according to World Trade Organization data, all U.S. exports to Mexico face zero percent tariffs. We have NATFA to thank for that.

The WTO reports that all non-agricultural U.S. exports to Canada also enter that country duty-free. And for all the talk about that pesky 270 percent Canadian tariff on U.S. dairy, 97 percent of U.S. agricultural exports to Canada are duty-free.

Other countries aren't as lucky when exporting to Canada and Mexico. The weighted tariff that non-U.S. foreign exporters face on their agricultural products sold to Canada is 12.4 percent, and on their non-agricultural products it's 2.3 percent. When non-Americans export to Mexico, agricultural tariffs average 20.1 percent, and non-agricultural ones average 3.5 percent. Other countries would love to get some of the NAFTA treatment.

NAFTA had a positive impact on the U.S. economy. Writing about the risk of withdrawing from the 1994 agreement in The Wall Street Journal a few months ago, Matthew Slaughter, dean of the Tuck School of Business at Dartmouth College, wrote, "In a new report canvassing dozens of academic and policy studies, I find that the U.S. gross domestic product is now 0.2 percent to 0.3 percent larger than it would be without Nafta, a yearly boost of about $50 billion."

And while NATFA did boost Canadian and Mexican imports into our country, it also boosted U.S exports and increased foreign investments on our shores.

You see, when U.S. consumers buy imports from other countries, they send dollars abroad. However, these dollars always come back to us because foreign holders use them to purchase U.S. exports or invest here (for example, Toyota builds a factory in Ohio, or Canadians buy U.S. government bonds). In other words, more imports result in more exports, faster economic growth and lower interest rates paid on our gigantic government debt. This reality explains why the Business Roundtable predicts that a withdrawal from NAFTA would, in the initial post-exit years, shrink the U.S. economy by $120 billion and reduce American exports by more than 2 percent.

American consumers enjoy many benefits from NAFTA-induced imports from Canada and Mexico. From low-priced clothing to lower-priced avocados, "American consumers have saved $10.5 billion a year from lower tariffs under Nafta," Slaughter writes, "with most of the benefits going to households with annual incomes below $70,000."

It's true that more imports from Canada and Mexico have destroyed some U.S. jobs in particular industries, yet this shake-up in employment is no different than shake-ups resulting from domestic competition (think about Expedia's impact on the travel-agent industry). For each job destroyed in given sectors, another job is created in other sectors because foreigners return dollars to the United States in the form of job-creating demand for U.S. exports and job-creating investments.

This is why economists, who disagree among themselves on many matters, all agree that trade doesn't create or destroy jobs on net. However, trade does make jobs more productive.

With all that goodness, I'm not sure what bad connotations the president believes the name NAFTA has. That said, the new deal between Mexico and Trump that is supposed to replace NAFTA does suffer from truly bad connotations. According to experts, it's an assortment of bad labor and environmental regulations, and tougher yet insane — and potentially impossible to implement — domestic-content rules for auto manufacturers.

Either way, we lose. If these new rules are implemented, Americans will pay much more for their cars, and jobs will be lost in the automobile and auto-parts industries. And even if not implemented, the chaos and uncertainty of the last year will continue.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. To find out more about Veronique de Rugy and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate webpage at www.creators.com.

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