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The Effects Of NAFTA Re-Negotiation Talks

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‘Many are stubborn in pursuit of the path they have chosen, few in pursuit of the goal’ – Friedrich Nietzsche.

This quote aptly describes US President Donald Trump’s current mindset. During his campaign before the 2016 elections, he was very vocal about his disregard of North American Free Trade Agreement or NAFTA calling it the ‘worst trade deal ever signed’. His reasoning consisted of the fact that NAFTA allows US companies to move manufacturing jobs to Mexico, where labour is relatively cheaper. However true it is, there is a specific way a president should go about his or her disagreement, a subject Donald Trump is not very familiar with.

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After being extremely against NAFTA, in April, Donald Trump requested renegotiation of the act. This came along with the simultaneous trade wars that he is trying to start and are ‘good’ according to him. It has a potential to turn into a snowball. Whenever a person has to take a major decision, he/she looks at the past. If this is not the first time a decision in this context is to be made, it makes the decision maker more impulsive. After this, Donald Trump has a precedence to look back to, for future trade tariffs, wars etc. This was proven with the subsequent tariffs of 25% tariff on imports of steel, and 10% tariffs on aluminium, on the European Union, Canada, and Mexico. NAFTA decision was also immediately followed by plans to put tariffs on 1300 Chinese products. Therefore, we can assume that a bit of hesitation that Donald Trump had before NAFTA in context of a potential trade war, is now gone.

If we look at the specific impacts of NAFTA on the global economy, it will have positive and negative effects on all the countries involved. Starting with Mexico, there are a few reports of worsening labour conditions in the country. This is mainly due to high investment of US manufactures in Mexico, and their expectation of cheap labour. However, there a big negative that overshadows it – loss of jobs. There are currently ‘almost 5 million jobs in Mexico and if NAFTA gets scrapped or is re-negotiated, chances are the many Mexicans will be out of work. The talks itself has created a doubt in the mind of the investors, companies and the workers about where do their future lie.

Looking at the United States, it’s probably the only country where positives come closer to negatives in the short term. Renegotiating NAFTA might end up bringing back manufacturing jobs to the United States. This would let small business owners to look for alternatives in the country itself. It will greatly help the middle class blue collar workers as they will have more job opportunities than ever before. Also, renegotiating NAFTA might open up opportunities for the US to have more bilateral trade agreements. They can go after weaker economies one by one and therefore can negotiate better deals, leading to more profits. However, in no way these silver linings are enough to re-analyse NAFTA. In the longer run, there are far more negative consequences. First and foremost, it hurts the credibility of US government to hold up deals. This may result to the fact that no country will have the same amount of confidence in the US government as they had before. It will also increase the prices of certain commodities such as jeans, automobiles etc., as most of them are manufactured in Mexico. Another probable consequence is new trade barriers. Canada and Mexico will retaliate for any tariffs which can result in lot of companies who have business in the 3 countries, to rethink their business model. A consequence that is less in the limelight is the possible repercussions from Non-NAFTA countries. Many will believe that this is start to a trade war and will end up bringing down the world economy. Countries like Mexico might sign deals with China which will allow China to manufacture goods in Mexico, United States’ own back yard.

For Canada, the impact is mostly negative. In a best case scenario, a re-negotiation could lead to 0.5 per cent decline in the economy, and the loss of about 85,000 jobs within a year. The real import prices from the United States would be plunged by $8 billion. The total job losses will be close to 91000. All these figures are not considering the possible trade tariffs and other barriers. The automobile industry ($6 billion imports) and the steel industry (90% imports to US) will be rattled if there is a re-negotiation of NAFTA. In the nutshell, although it’s a relatively small impact, NAFTA renegotiation will be a problem for Canada.

Overall, NAFTA renegotiations, if gone wrong, which looks more probable as the days go, would impact the world economy. It could become self-defeating for US as their companies might not remain competitive enough to the likes of China and Japan. Mexico’s economy will suffer and Canadians will feel the impact as well. In the world of globalisation, the countries need more pacts like NAFTA and hopefully, however unlikely, these negotiations won’t cross a certain threshold.

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