The Opposite of Free Trade Could Be Very Expensive Trade

Nobody wins if NAFTA negotiations fail.

By most accounts the current renegotiation of the North American Free Trade Agreement (NAFTA) is not going well. Changing the trade agreement began as a campaign promise from Trump in 2016 when he referred to it as “the single worst trade deal ever approved in this country” during one of the Presidential debates. At the beginning of 2017 Trump spoke about pulling out of NAFTA all together, however by the middle of last year the administrations goals had shifted to revamping the agreement instead. The main priorities for the U.S. during the negotiations were set to be promoting auto production in the U.S. and generally reducing the U.S. trade deficit. Canada and Mexico seemed to be using the renegotiation as an opportunity to bring NAFTA into the new millennium by adding language regarding digital trade and other updates.

While the goals of the various parties are not necessarily antithetical to each other the negotiations have been hitting one brick wall after another, most of them thrown up by the U.S. Hopes for reaching a deal dimmed last week when Vice President Pence apparently communicated to Canadian Prime Minister Trudeau that the U.S. would only sign a deal that had a five-year time limit. Trudeau declined to proceed under those terms and then Trump imposed steel tariffs on Canada and Mexico.

Talks have stalled for now and if negotiations don’t resume soon then there will not enough time to reach a deal and have the current U.S. Congress approve it before their term ends this year. There is a chance that rather than moving forward with a new NAFTA the countries could instead create new bi-lateral agreements among themselves, which is what the Trump administration seems to be pushing for at the moment. But brand new one on one agreements would take time to create too. In the mean time the talks could be put on hold and the existing agreement could be used until the new Congress comes in 2019, or what seems increasingly likely, one or more parties will withdraw from NAFTA before there is anything to replace it.

If that happens there will be a range of negative impacts across various sectors of the U.S. economy. The biggest and first hit will probably be to U.S. agriculture. U.S. farmers export tens of billions of dollars worth of goods to Mexico and Canada each year, and the value of U.S. agricultural exports to its neighbors has quadrupled since NAFTA began in 1994. Those exports won’t stop cold if NAFTA dies but if Mexican and Canadian buyers and forced to spend more on tariffs then it disincentivizes buying U.S. products. For farmers the current trade limbo is an extremely difficult situation because it takes time to bring agricultural products to market and not knowing what trade agreement, or even what kind of trade agreement, will be in place next year is highly destabilizing.

U.S. consumers will feel a loss of NAFTA as well. The Food Marketing Institute estimated that NAFTA saved the average American over $3 on red meat on Memorial Day weekend alone. That’s a very rough estimate, but it serves as a useful illustration of how losing NAFTA will hit U.S. grocery baskets. A few dollars more for a product here and a product there every week can add up to hundreds or even thousands of added annual costs for many U.S. households. This will be a hard adjustment for shoppers, and for retailers as well. When prices go up due to something like added tariffs it cuts into retailers profit margins. In industries or businesses that have slim profit margins, for instance grocery stroes, this can lead to job losses and business closures.

Free trade in general and NAFTA specifically are so important to the U.S. economy that this issue is already transcending party lines. Influential Republican donors the Koch brothers have launched a campaign to promote NAFTA, the Trans Pacific Partnership, and other free trade agreements. North American trade is a complicated web of buying and selling raw materials, manufactured goods, and agricultural commodities across multiple borders. Changes to NAFTA will have far reaching effects across many industries and economic sectors. It will probably be impossible to make a new agreement that is better for everyone, but it certainly possible to make a new NAFTA that is more modern and that has a net benefit for North American economies and most American consumers.

While it’s up for debate whether or not NAFTA is actually “the single worst trade deal”, it’s hard to see how no NAFTA could possibly be better for the U.S. Extra dollars that are spent on tariffs for a foreign government don’t end up back in the U.S. economy, and any extra dollars that are gained by the U.S. government from added tariffs on Canada and Mexico are not going to have a lot of tangible benefits, economic or otherwise, for U.S. citizens or businesses.

Comments
FelixCulpa
FelixCulpa

I didn't say "stranger", I said "equally strange". I'm certain that nothing stranger has ever happened. As far as data goes I'd settle for a reasonable projection, but I expect that there are few, if any, of those around, and that the projections available are both highly dubious and come from partisan sources. Maybe we just have to pay more for less stuff. Convince companies to sell quality instead of quantity. Won't work for a lot of stuff, but companies like LL Bean have made a go of it, so it's not impossible.

A_Chapman
A_Chapman

Editor

I am honestly not sure that anything stranger than that has happened anywhere ever :) And I haven't been able to get reliable data on what the actual revenue will be from the tariffs, typically it would take months for that kind of calculation to come out so we may have to wait. But whatever the added revenue is, my suspicion is that it won't account for the loss in taxes because of the negative impact on the economy and on businesses. It's true that especially after the recent tax cuts, the deficit and debt are even more out of control than ever, but I just don't think tariffs are an economically feasible way to address that. You do bring up an interesting conundrum, is it possible to reign in American consumerism without damaging the economy? Or is it possible to keep growing our economy without continuing to wreck the environment? I don't know.

FelixCulpa
FelixCulpa

Does anybody have any data on what would be the effect on US Government tax revenue if these tariff go into effect? Looking down the barrel of a 1,000,000,000,000 (don't bother counting zeros; it's 1 trillion) dollar deficit next year makes me wonder. I know their would be reciprocal tariffs as a result, but mightn't that not be such a bad thing either? Stuff is more expensive, so you buy less stuff. Isn't that what we're supposed to be doing to save the planet anyway? An embrace of moderation has to begin somewhere. Granted, I will laugh myself sick with the irony of life if it turns out Donald J. Trump brings about the birth of moderate consumerism in the American public, but equally strange things have happened before. I think, somewhere, probably.

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