It’s not just Washington and the United States that President Donald Trump is turning upside down with his political antics and barrage of unending tweets. He’s about to upend North America with the renegotiation of the North American Free Trade Agreement (NAFTA) in his bid to “make America great again.”
Since NAFTA was signed in 1993, North America has become the world’s economic juggernaut with a combined GDP in the three countries (Canada, Mexico and the United States) of more than $20 trillion US. North America’s population, which is just shy of half a billion people, is smaller than Europe’s or China’s, but its output is bigger than the 28 countries of the European Union and almost double that of China ($11.2 billion US). Consumers and producers in the three countries have benefited enormously from the elimination of barriers to trade in goods and services and the greater mobility of peoples across their borders. From 1993 to 2015, trade quadrupled among the three countries from roughly $300 billion to $1.2 trillion. In the same period, U.S. exports to Canada and Mexico grew almost five-fold, from $151 billion in 1993 to $590 billion.
As Jean-François Perrault, senior vice-president and chief economist at Scotiabank, notes: “The integration of supply chains across NAFTA’s countries has helped realize otherwise unattainable economies of scale and efficiencies that have made North American industry more globally competitive.”
However, the fate of the world’s juggernaut now hangs in the balance.
On Oct. 24, 2017, a strident Trump told a group of Republican senators at a private luncheon on Capitol Hill that he was going to give Congress six months’ notice that the United States would start the process of withdrawal from NAFTA. The president assured his skeptical and generally unreceptive audience that this was simply a bargaining tactic to force Canada and Mexico to make major concessions at the negotiating table. The president ended his remarks by adding that Congress should trust him to get a better deal, but did not specify what that might mean in concrete terms. One report about the meeting noted that the president specifically mentioned reducing the trade deficit with Mexico, and that his preoccupation with trade deficits borders on an obsession.
Many senators left the meeting more confused than ever about the president’s ultimate game plan. One senator said he wouldn’t be at all surprised if the president pulled out of the agreement, noting that the administration was “way off on [its] trade policy.”
The president’s threat to pull out of NAFTA came shortly after the fourth round of talks in Washington stalled when the Americans tabled a number of unacceptable demands that left their negotiating partners reeling. One was a rules-of-origin proposal for automobiles and automobile parts to raise U.S. domestic content to 50 per cent and the regional content from 62.5 per cent to 85 per cent. Such measures would effectively destroy North American supply chains in the automobile manufacturing sector while raising costs for the industry that invariably would be passed on to consumers and perhaps even push more U.S. production offshore.
The United States also signalled that it wants to gut Chapter 11 of the NAFTA agreement, which regulates the investor-state dispute settlement process and allows companies to sue governments when legislation has a negative impact on profits. And, it wants to simultaneously eliminate dispute settlement mechanisms in Chapter 19 and 20 of the agreement. Dispute settlement mechanisms were a make-or-break proposition in the original free-trade negotiations between Canada and the U.S. in the late 1980s. Canada refused to sign an agreement that did not include provisions to allow companies to fight anti-dumping duties.
In addition to demands to eliminate supply management in the dairy sector, which is directed primarily at Canadian producers, the United States has also insisted on a five-year sunset clause in NAFTA that would terminate the agreement unless the parties decide to renegotiate it.
These “poison pills” that the Americans tabled have left Canadian and Mexican negotiators wondering whether Trump really wants a new NAFTA agreement or whether he is simply trying to get the U.S.’s partners to walk away from the table.
Canada’s chief negotiator, Steve Verheul, is reported to have warned Canadian business leaders to “get ready to live without NAFTA.”
The American business community is not very happy either. The U.S. Chamber of Commerce has rallied U.S. business leaders, urging them to pressure the administration “to stop and recalibrate its approach and listen to agriculture and business interests.” The Chamber of Commerce has good reason to be worried. Already, Argentine wheat producers, Brazilian corn producers and Chilean apple producers are beginning to supply the Mexican market. Their market share would grow dramatically if NAFTA disappears and Americans would be the big losers.
The end of NAFTA would have severe consequences for all three countries, although Canada and Mexico would suffer most because of the relatively small size of their economies compared to the United States and their dependence on U.S. markets for their exports.
Dan Ciuriak, a former official in Canada’s finance department, has been running computer models to assess the impact of the end of NAFTA as well as other U.S. trade deals. Some of his preliminary estimates, as reported in the media, suggest that the end of the free-trade agreement “would slice 2.5 per cent from the Canadian economy,” though “the initial shock might be more severe.” Already, NAFTA’s uncertain future is hampering investment in Canada.
Although Mexican officials are trying to put on a brave face by saying Mexico could live without NAFTA because its economy is still competitive vis-à-vis the U.S. and duties would then revert to those set by the World Trade Organization, others aren’t so sure. As The New York Times reported, some experts believe that “an American withdrawal from NAFTA ,would call into question the viability of Mexico as an outsourcing destination.”
However, if Trump blows up NAFTA, the consequences will be far more broad than just higher prices for consumers, job losses and an erosion of North American prosperity and global competitiveness.
The 2017 Mexico Peace Index (MPI), produced by the Institute for Economics and Peace (IEP), provides the most comprehensive measure of peacefulness (measured in terms of homicides, violent crime, kidnappings, extortion, etc.) in Mexico. Although Mexico’s peacefulness deteriorated by 4.3 per cent in 2016 (the 10-year anniversary of the declaration of the war on drugs), the report finds that this deterioration was relatively modest compared to Mexico’s most violent year (2011). Further, according to the report, “Mexico remained nearly 14 per cent more peaceful in 2016 than in 2011, with improvements being recorded in 21 out of 32 states in 2016. The violent crime rate is at a 14-year low and the homicide rate is 16 per cent lower than in 2011. Organized crime-related offences reached a 10-year low, having returned to pre-drug-war levels. The rate of crimes committed with a firearm was 10 per cent lower than in 2011, although recent trends show an increase in the purchase of guns.”
The general improvement in Mexico’s overall domestic security situation is due to major judicial, policing and governance reforms that were introduced some years ago, but also the country’s relatively stable economic growth rates compared to many other Latin American countries, especially in its northern tier states, where many NAFTA-based firms are concentrated.
If the Mexican economy takes a major hit — as it almost surely will if NAFTA dies — a deterioration in Mexico’s security situation might well follow, spilling across the border into the United States. Cross-border crime and the drug trade are endemic problems for U.S. law and drug enforcement officials. But they could get a lot worse if the Mexican economy falters. U.S. officials may also find their Mexican counterparts to be much less co-operative than they are now when it comes to tackling transborder crime and other security concerns with the deterioration in political and economic relations between the two countries.
Some years ago, the New York-based Council on Foreign Relations undertook a major study of North America under the title North America: Time for a New Focus. It argued that “it is time for U.S. policymakers to put North America at the forefront of a strategy that recognizes that North America should be the ‘continental base’ for U.S. global policy.” The study was co-chaired by Gen. David H. Petraeus and former U.S. trade representative and World Bank president Robert B. Zoellick. The report argued for greater co-operation among the three North American partners on a wide range of issues, including trade, energy, the environment and security on the grounds that closer co-operation would only serve to “strengthen the United States at home and enhance its influence abroad.” The report urged the U.S. government “to break old foreign policy patterns and recognize the importance of its own neighborhood” in order to extend the U.S.’s “global reach.”
President Trump is certainly breaking the mould when it comes to the U.S.’s neighbourly relations, but doing so in ways that may prove to be destructive and damaging to U.S. national interests. There is also a real danger that if he destroys NAFTA, his successors won’t be able to undo the damage. As Republican Senator Pat Roberts of Kansas recently opined, “to re-stitch that and put it all back together — it’s like Humpty Dumpty. You push Mr. Humpty Dumpty trade off the wall and it’s very hard to put him back together.”
Fen Osler Hampson is director of the World Refugee Council. He is also a distinguished fellow and director of the global security and politics program at the Centre for International Governance Innovation and Chancellor’s Professor at Carleton University.
