As negotiations over the North American Free Trade Agreement have driven a wedge between U.S. President Donald Trump and Canadian President Justin Trudeau, and the White House prepares to leave Canada behind with an updated bilateral trade deal with only Mexico, panelists at University of Wisconsin asked the question: Was the trade deal all that bad to begin with?
Trump has railed on NAFTA, an agreement between the U.S., Canada and Mexico, from the start of his presidential campaign. Calling it “the worst trade deal ever,” he has recently threatened to pull the U.S. out of the 1994 agreement, roiling global markets, according to The Guardian.
Panelists Phil Levy, a professor from Northwestern University, and Maria Muniagurria, a faculty associate in UW’s Department of Economics, said Trump’s aggressive stance on the deal and his urgent insistence on signing new trade policy exaggerates the actual issues with NAFTA.
“Just because trade creates losers does not mean all losers are created because of trade,” Levy said.
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Citing Federal Reserve Bank of St. Louis data that showed the share of manufacturing jobs declining steadily since WWII, Levy said there was no sharp break in the manufacturing jobs when NAFTA was signed in 1994. Not even a “wiggle.”
As manufacturing jobs have declined, productivity went up, suggesting – but not proving – improvements in technology has more to do with lost jobs than trade policy, Levy said.
If the wrong answer for altering or backing out of NAFTA is to “Make America Great Again,” Levy said the right answer has enjoyed a decades-long consensus among economists and trade experts: it’s outdated.
As the economy has changed in the 24 years since NAFTA was put into effect, the deal has remained the same. The Trans Pacific Partnership, a 12-nation trade agreement that included the U.S., Canada and Mexico, would have addressed the new developments in the economy, like e-commerce, Levy said. But Trump was not a fan of the TPP either, calling it a “potential disaster for our country.” In the first week of Trump’s presidency, the U.S. backed out of the deal, making it defunct.
Muniagurria said she was in Mexico when Trump criticized NAFTA.
“The uncertainty … was really immense. I remember going to talks where they would say this is the path Mexico is going to follow if we have [newly elected president of Mexico Andrés Manuel López Obrador] winning and with NAFTA [declining],” Muniagurria said, gesturing her arm downwards as though the end of NAFTA would send the country on a downward spiral.
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Once AMLO is inaugurated Dec. 1, he won’t have much of a choice in reneging on NAFTA. Despite his progressive politics and his reluctance to focus on trade negotiations, Muniagurria said Mexico has become dependent on the U.S. Eighty-one percent of Mexico’s exports go to the U.S while only 16 percent of U.S.’ exports go to Mexico.
The new trade deal, signed in August by Mexico and the U.S., is NAFTA 2.0. According to the New York Times, the core of the agreement, allowing American companies to operate in Mexico and Canada without tariffs, remains untouched while “provisions surrounding the digital economy, automobiles, agriculture and labor unions” have been added.
Trump, sending a shot at Canada, said NAFTA has a “bad connotation” and that “we’re going to call it the United States-Mexico Trade Agreement,” according to NYT.
Levy said the new deal is impractical. New auto restrictions, like requiring 75 percent of an automobile’s value be manufactured in North America, neglects basic understanding of how supply chains work.
The deal will make cars more expensive, Levy said.
Underlying Trump’s disdain for trade deals is misconception of their impact on economies, Levy said. Trump’s insistence that NAFTA created the trade deficit between U.S. and Mexico ignores the fact that trade policy doesn’t create surpluses and deficits.
“At one point … the president had just met with Angela Merkel, the chancellor of Germany, and he said, ‘Germany runs a really big trade surplus, they must have fantastic trade negotiators,’” Levy said. “Well, that’s kind of funny, because it’s not actual Germans who negotiate their trade deals, it’s the European Union.”
If trade policies are the same, variation in surpluses and deficits among EU nations would not be the result of the policies themselves but due to macroeconomic policies, Levy concluded. Despite Germany and France being similar nations and operating under the same trade policy, Germany runs a big surplus and France runs a deficit.
Much like the differences between Germany and France, as the White House continues to level tariffs on aluminium and steel, trade allegiances are already shifting, Levy said. With the U.S. being the only one putting up trade barriers, they may be left behind.
