The world is watching as President Donald Trump inches closer to an agreement with Mexico on trade. Trump is seeking to revamp key aspects of the 24-year-old trade agreement to make good on signature campaign promises in the hopes that they will boost American manufacturing. But whether that desired outcome happens under the new agreement is in part determined by what NAFTA actually does, and what it doesn't do.
Trump has been in talks with Mexican President Enrique Peña Nieto this week hoping to reach a deal to make changes to the landmark free-trade agreement. Thus far, Trump has moved to negotiate a deal with Mexico on his own, cutting out the agreement's third partner, Canada, entirely.
The North American Free Trade Agreement (NAFTA), which was drafted under President Ronald Reagan but went into effect in 1994 under President Bill Clinton, created a trilateral deal between Mexico, the U.S., and Canada. The deal was designed to incentivize trade between the countries by eliminating almost all tariffs on goods. Without all that added tax for goods crossing borders, businesses could outsource their manufacturing to Mexico to save on labor costs, and transfer that savings to consumers in the form of lower prices — so consumers would save, businesses would save, and everyone would win.
Labor in Mexico is much cheaper, so the cost to manufacture there is a better deal for U.S. businesses, as CNN explains. Denim is a key example: Raw denim gets manufactured in the U.S., the material is then shipped to Mexico for production, and the resulting jeans get shipped back to be sold to U.S. consumers — so businesses can cut labor costs and don't have to pay any extra fees to transfer their goods back and forth. The agreement was most felt in the manufacturing, consumer goods, and agricultural sectors.
The result of NAFTA's model was that some U.S. manufacturing jobs would inevitably be lost — although the myth blaming job loss on NAFTA has been largely disproven. As a Congressional report from 2015 found, automation is much more to blame. Among NAFTA's criticisms are that it led to "a race to the bottom" by reducing wages for U.S. and Mexico's workers across the board, while proponents have pointed to growth in GDP and millions of jobs.
Trump is proposing two main changes to the deal that will impact automakers, but how large of a difference they make, and whether they do what he says they will, are big questions, and the president is facing a tide of critics.
The current NAFTA on the books requires 62.5 percent of any American car's value to be U.S.-made in order to qualify for no tariffs. Trump wants to raise that percentage to 75 percent.
Second, Trump is proposing to mandate that 40 to 45 percent of the car gets manufactured by workers earning at least $16 an hour. Because that's much more than the going rate Mexico pays its workers for car manufacturing, it indicates shifting productions elsewhere. As a result, as economics professor Tyler Cowen writes for Bloomberg, this means some production will indeed shift back to the U.S. — but at a cost to consumers.
The punishment for refusing to comply with the new standards would be a massive tariff, so if an automaker decides not to comply, consumers will end up paying a lot more for the car.
What remains unclear is whether Trump will remove Mexico (and Canada) from the list of countries that he slapped with a 25-percent tariff on aluminum and steel.
As Peterson Institute Senior Fellow Mary Lovely tells Bloomberg, the changes to businesses would be cumbersome and could heavily impact trade with the EU and China. She expects that 25 percent tariff to take effect, saying that for businesses, "Jumping through all these hoops is only worth it if you're going to avoid a very large tariff."
What's more, as two other Bloomberg columnists point out, the percent change from 62.5 to 75 percent would only affect three kinds of cars.
The Wall Street Journal's editorial board also criticized Trump's deal for stripping protections from investors and setting up what it called "red tape" on the auto industry.
Beyond the auto industry, changes on the table would include loosening regulations on oil and gas, infrastructure, energy, and telecommunications industries, per the Times. And the overall effect of NAFTA — eliminating tariffs across goods in many industries — would largely stay in place.
Trump's deal with Mexico also sets in place new terms of renewal for the agreement, mandating that all parties must agree to the deal upon review every six years.
Despite initial movement for a bilateral U.S.-Mexico deal, Canadian and Mexican officials have signaled that they expected to the final deal to be reached with the inclusion of the northernmost partner.
According to The New York Times, Jay Timmons, president and chief executive of the National Association of Manufacturers, expressed concern that Canada hasn't thus far been central in the negotiations. "Because of the massive amount of movement of goods between the three countries and the integration of operations which make manufacturing in our country more competitive, it is imperative that a trilateral agreement be inked,” Timmons said in a statement.
As for why the administration is in such a rush to get this deal over and done with, as you might expect, it's all political. Per trade statutes, Trump can ratify NAFTA, but has to give Congress and the co-signers six months' notice before any proposed changes can take effect. Peña Nieto will be soon replaced by Mexico's new president, who will be sworn in on Dec. 1. It's not clear that the president-elect, Andrés Manuel López Obrador, would buy into any NAFTA deals. So Trump is racing to get a deal through before that date.
Secondly, after presenting a new trade deal, there is a 90-day window within which all nations must sign onto it before an implementation bill can come before Congress. U.S. trade representative Robert Lighthizer said they plan to finalize the deal on Friday, per The Hill, so any bill on a new deal would be at least three months out and likely wouldn't go to a floor vote in Congress until after the midterm elections — at which time Republicans would presumably need Democratic buy-in to move anything forward. The Hill points out that this timeline may give Democrats in Congress some leverage if they pick up seats in November.
As for whether Canada does get included in the deal, and whether it happens by the week's end, remains to be seen.