By: Bob Brewer, VP Marketing
President Trump made it perfectly clear that he plans on following through with the re-negotiation of NAFTA.
As most can’t look away, via our daily feed of what I would identify as a “veritable plethora” of new executive orders being signed, a meeting with the Canadian Prime Minister Justin Trudeau and Mexico President Enrique Pena Nieto was on the agenda, but Mexico uninvited themselves after President Trump went public on moving forward with building “the wall,” and subsequently who was going to pay for it….Mexico ultimately. I must insert the phrase, “At the time of this writing”, since the status changes by the minute and now they are at least being civil to one another and talking, but President Trump is not backing down on building the wall. So, who knows if/when this meeting will ever get back on the official Presidential agenda, since also “at the time of this writing” President Nieto’s approval rating is less than 12%, so there is a great deal of pressure on him to stand firm when it comes to relations with the U.S. President. In line with his former statement of claiming NAFTA it to be, “The worst trade deal ever made in history of trade deals” will be the battle cry as he attempts to lead his reform through the constitutional process, apparently without any input from the Mexican President. The key operative word here is “process.” According to the Constitution, the President has the power to negotiate treaties with foreign nations, but the Senate must approve with a two-thirds vote. Now, I could totally digress here and interject that the current state of affairs regarding trade with China should bump NAFTA from his top (10) list, but for now, let’s stay on topic, and just keep shopping at Walmart.
So, on topic, Congress has delegated authority to the President to negotiate tariff barriers with foreign nations. Unlike treaties, trade agreements affect U.S. law regarding foreign commerce, which Congress regulates, thus requiring legislation in order for it to be implemented. Also, Article I of the constitution states that bills concerning the generation of revenue must be introduced in the House of Representatives. Since free trade agreements deal with our nation’s revenue stream, the House has a Constitutional obligation to participate.*
The rhetoric thus far from President Trump regarding NAFTA does of course beg the question ‘What’s the worst thing about the agreement”? Well, the standard answer is in lost jobs. Business 101 will tell you that labor is cheaper in Mexico, so many manufacturers simply packed up and moved their production from the U.S. to Mexico. As a result, these manufacturers exporting back into the U.S. are contributing to America’s trade imbalance with Mexico, which was $60.6 billion in 2015, an 8.4% increase ($4.5 billion) over 2014, and 2016’s deficit was ($58.7) billion per the U.S. Census Bureau stats. An improvement, yippie! The goal being to gradually bring jobs back to American soil, without causing a major trade crisis through actions like slapping large tariffs on imports, begs another question, “Is NAFTA really to blame for the lost jobs in the first place?” Many economic experts would disagree.
The facts are, the U.S. has seen a decline of nearly 5.5 million manufacturing jobs over the past 25 years, but the number of people employed in manufacturing has risen from a low of 11.5 million in early 2010 to 12.3 million at the end of 2016. Just how many of those jobs disappeared due to trade remains a matter of (using one of President Trump’s frequent exclamations), “Huuuuuuge” debate. “About 20 million people lose their jobs due to layoffs and plant closures every year, and fewer than 5% of those are due to imports”, said Robert Lawrence, a professor of international trade and investment at Harvard’s Kennedy School of Government. What about automation? Don’t get me started on automation, because that would be an entirely new article regarding new technology, and how it has replaced millions of humans in the manufacturing process over the last 3 decades. One study by two Ball State University professors found that between 2000 and 2010, about 87% of the manufacturing job losses stemmed from factories becoming more efficient. The chief driver of more efficiency in factories: automation and better technology. The other 13% of job losses were due to trade. Technology is even moving into the service industry as the first robotic barista in the U.S., named “Gordon,” started serving up to 120 coffee drinks an hour, just several thousand feet away from a Starbucks in the same complex. However, it’s not just humans in general vs technology, as many simply move into other areas of work from the manufacturing floor and aren’t replaced. Many well published economists consider there to be various causes in manufacturing job losses in the last 25 years, so instead of pointing the finger at perceived negatives with NAFTA, let’s look at some of the good that has come from it.
Between 1993-2015, trade between the three members of NAFTA quadrupled, from $297 billion to $1.14 trillion. That boosted economic growth, profits, and jobs for all three countries. It also lowered prices for consumers.
During that time, the United States increased its exports of goods from $142 billion to $517 billion. That’s a third of its total exports. Canada ($280 billion) and Mexico ($236 billion) were the top two U.S. export markets in 2015. Imports from Canada ($295.2 billion) and Mexico ($294.7 billion) increased from $151 billion in 1993 to $590 billion. That’s 26 percent of total U.S. goods imports. (Source: “2015 Total Trade,” United States Census.)
NAFTA boosted trade by eliminating all tariffs between the three countries. It also created agreements on international rights for business investors, which reduced the cost of commerce and increased investment and growth, especially for small businesses.
As some would profess, NAFTA created the world’s largest free trade area of 450 million people. It’s “huuuuuuuge!” It’s an economic powerhouse of $20.08 trillion, as measured by Gross Domestic Product (GDP). That’s because it links the economies of the United States ($17.97 trillion), Canada ($1.6 trillion), and Mexico ($2.2 trillion). That trade area is greater than the economic output of the 28 countries in the entire European Union. So, as the debate will continue regarding what the advantages, and disadvantages, of NAFTA are, and just who or what is to blame for the trade imbalance, what remains in place regardless, is the process for Congressional approval over any changes to the current agreement.
The legislative process for free trade agreements was established in Section 151 of the Trade Act of 1974. This section provided the President with the necessary negotiating tools for dealing with tariff and non-tariff barriers. The law requires the President to consult Congress 90 days before signing the agreement. Upon signing, the President has 60 days to provide Congress with a list of changes to existing U.S. statutes in order to comply with the agreement. To assure the executive and his foreign counterparts that the agreement would remain generally unscathed, legislators are unable to amend the deal once legislation has been introduced.
In the end, the re-negotiation of NAFTA stands a true test of “common ground” between not only Canada and Mexico’s government’s, but that of the U.S. and those who it will affect the most, American citizens. Citizens who will take to the streets in a “huuuuuge” protest when the cost of goods from Mexico is 10x’s the current price. Imagine avocados at $10 each. You don’t want to mess with our guacamole!
The reality of the situation is, re-negotiating NAFTA is much easier said than done, as the ramifications for change could actually do more harm than good. From CNN Money’s Patrick Gillespie, “Trump’s threat to put hefty taxes on Chinese and Mexican goods coming into the country would likely sink the economy into a recession. It would also make many items at the store more expensive for working class Americans and spark a global trade war. Apparently, the U.S. tried this tactic in the 1930s with a law known as Smoot-Hawley Tariff Act. It backfired, pulling the U.S. further into the Great Depression.” Good luck on this one President Trump.
Resource data collected from: CNN Money’s Patrick Gillespie, Thebalance.com, and “Free Trade Agreements” by Mark Strand, President of the Congressional Institute. (The Congressional Institute project is dedicated to explaining parliamentary procedure, Congressional politics, and other issues pertaining to the legislative branch.)
