The Consequences of US Renegotiation and Withdrawal of NAFTA

Following President Trump’s inauguration, Trump aims to renegotiate NAFTA affirms that he will have Canada and Mexico notified of his plans as he favors bilateral deals in place of multilateral deals. Trump demands that Mexico slash its value-added duties and terminate its Maquiladora program. Maquiladoras are factories in Mexico that runs on special tax schemes set up as well as managed by the United States and Mexico. Items such as manufacturing parts and equipment utilized within maquiladoras permitted to move into Mexico duty-free and in turn Mexico enjoys lower taxes for exports to the US than other nations. In the event that Trump feels that there is a lack of favorable agreements for US firms that can be made, Trump has warned that he will pull the US out of the agreement. There is an ongoing policy debate on the actual benefits and consequences of NAFTA. The main reasons why the current administration wishes to renegotiate NAFTA. It is believed by the current administration that NAFTA has resulted in a loss in manufacturing professions in the US as manufacturing is carried out in Mexico at a much lower cost. Another reason why is that manufacturing employees who still work in the few manufacturing companies that have stayed in the US need to embrace the reduced salaries. This policy brief aims to clear the misconceptions of the effects of NAFTA, provide recommendations to ameliorate the trade agreement and prevent the mistake of renegotiating on the terms of the current administration or in the worst case the withdrawal of the US from the agreement.

Seeing that as the Mexican economy grows as well as the incomes of individuals in Mexico due to NAFTA, subsequently demand for US goods increases which benefits US exporters. There are two effects on the US workforce market of the development of the Mexican economy. Principally, US workforce markets will continually experience smaller migration strains as the size of the Mexican economy increases. Next, there are possible employment increases in the US as the economy of Mexico grows. US export developments are regarded confidently for its employment impacts as well as its trade stabilizers.

Mexico as well as the US has increased 1.31% and 0.08% in welfare respectively. Each NAFTA member experienced a raise in real wages. With regards to trade and volume of trade goods, nearly all of the increases in welfare from NAFTA are the outcomes of a growth in the volume of trade. Trade produced among NAFTA members was bigger than that of the trade redirected from other nations. Just a few sectors were at the helm of accumulation of volume of trade goods, which were sectors particularly safeguarded prior to NAFTA; such as textiles within Mexico, with a great elasticity; such as petroleum; as well as a big portion of material use and sector interdependence, such as electrical machinery, and most importantly autos.

Decades prior to NAFTA, the US manufacturing industry was subjected to pressure and the current problems of the manufacturing industry in the US has hardly anything to do with NAFTA according to numerous economists. Trade with China starting from 2001 when China entered the WTO as well as fundamental technological revamps are mainly credited for the precipitous decrease in occupations, which dropped from seventeen million to eleven million from 2000 to 2010, in the US manufacturing industry according to University of California, San Diego’s trade specialist and economist Gordon Hanson. As declared by Gordon Hanson, “China is at the top of the list in terms of the employment impacts that we found since 2000, with technology second, and NAFTA far less important”.

NAFTA has assisted the US automobile to rival China’s automobile industry in actuality, according to Gordon Hanson. NAFTA enhanced the competitiveness of the US, enhanced efficiency as well as reduced expenses through playing a part in the progress of cross-border supply chains. This implies casting off some occupations in the US because occupations are carried over to mexico. Yet, still additional jobs would have been vanished in the absence of NAFTA as contended by Hanson. You can enjoy a geographical manufacturing group where merchandises are able to go to and fro since Mexico is very near. Gordon Hanson declares that the manufacturing sector in the three nations are able to be exceptionally unified. In the absence of NAFTA’s aegis for intellectual property as well as NAFTA’s tax cutbacks, it would be a lot more harder for the US automobile industry to have an upperhand in the context of China as it is these type of linkages that have provided the US automobile industry with an upper hand. US exports of automobiles in 2002 were 38 times larger than exports in 1993, which added up to $3.6 billion. From 2009, exports of US auto parts to Mexico have additionally increased twofold from $12.1 billion to more than $26.5 billion in 2013, more than $29 billion in 2014 and more than $30 billion in 2015. The US economy and specifically the US auto parts industry is closely connected to the Mexican auto parts industry. In order to make exports across the globe, US automobile producers as well as their suppliers have set up factories in Mexico, who were given incentives due to NAFTA and cheaper workforce expenses. Up to 75% of the whole amount of US exports of auto parts have been contributed by NAFTA. Contrasting to expenses in the United States, Mexico provides 10% in cost reductions as stated by INA (National Auto Parts Industry).

The US economy and its companies will be subject to every type of unintended repercussions if the US were to withdraw from NAFTA. Compared to Mexico as well as Canada, US exporters have a lot to lose if taxes before NAFTA were to be reintroduced as the United States’ top trade partners are Canada and Mexico. From 2002, 8 years after NAFTA was introduced, US exports to these two countries have been increased up to twofold in the previous twelve-month period in 2016.

Depending more on importing oil from other nations, some who are not as affable towards the US is more costly than importing from NAFTA members. The termination of NAFTA will render the US more dependent on imports from OPEC members like Venezuela and Saudi Arabia. Mexico and Canada together exports 48% of the total US oil imports in 2016, which is more than imports from all OPEC members put together.

Manufacturing in the Mexican automobile industry will drop if a more protectionist attitude were to be taken in regards to NAFTA. In the United States, manufacturing of essential automobile components will drop as a result. Additionally, since the cost of components like seats as well as dashboards that are at the present time being manufactured in Mexico will rise, manufacturing of bigger automobiles in the United States will be more costly. In the end, as parts grow more costly, completely integrating manufacturing in the US will come to be unprofitable. Automobiles will then be imported from europe once more with some components built in Eastern Europe in this situation. Instead of manufacturing in the US, firms such as Volkswagen might resolve to begin importing automobiles. Automobile manufacturing in the US will not grow if NAFTA is to be revoked according to new analysis. With regards to a drop in automobile manufacturing, the revocation of NAFTA will affect Mexico and Canada the most. Nevertheless, a drop in demand in those nations for US automobiles accompanied by inflated costs for components will additionally cause a drop in US automobile manufacturing. Automobile manufacturers in other nations such as those in Eastern Europe and Asia will react by increasing output as they would profit from inflated North American automobile costs. Manufacturing occupations will be lost as a result of a reduced manufacturing for US automobiles. In 2014, service exports contribute to 193,000 occupations and goods exports contribute to 953,000 jobs which totals up to an approximately 1.1 million occupations contributed by US goods and service exports as stated by the US Department of Commerce. Some regions are extremely vulnerable as well. Michigan’s exports are focused on the automobile industry going to Mexico as well as Canada for example. Exports from Michigan alone contribute to 270,000 occupations as evaluated by the US Department of Commerce. Around 6 million occupations in the United States rely on dealings with Mexico.

Compared to foreign producers, a revocation of NAFTA will cause the US to be less competitive as parts imported from Mexico will be tormented by inflated expenses since US automobile manufacturers are reliant on cheap components. This results in a supply chain disturbance, which the automobile sector serves as a chief case in point. The US automobile sector will experience losses in occupations as a result of losing market share to foreign automobile firms. Purchasers will then have to be faced with more costly automobiles as well. However, the automobile sector will not be unaccompanied by the other sectors in this ordeal. Other production sectors have too grown to be even more consolidated into the broad supply chains of NAFTA. Not only will protectionist actions like increasing taxes on Mexican imports lessen Mexican imports, it is also able to endanger a notable portion of US exports to retaliatory actions. Moreover, applying protectionist actions will cause the US market to experience fewer heterogeneity as well as elevated costs. It is possible that the renegotiation of NAFTA will harm not only the economic development of the US but also the favorable view from global trade.

With the current policy the US is evidently has a considerable edge as it is. What the US needs to do is to optimize the current policies in order to protect US occupations as well as reinforce the country’s economic development by fortifying the current North American economic bond instead of renegotiating with a protectionist stance, drawing away from NAFTA and introducing policies closer to that of pre-NAFTA, which most likely will achieve undesirable results. It is understandable that NAFTA isn’t flawless and it is important to recognize the potential drawbacks of NAFTA. However, the issues addressed by the current administration have already been proved to be misleading in terms of the performance of the US economy as a whole and more importantly job losses and specifically the condition of the auto and manufacturing industry.

In order to encourage a more robust economy the following optimizations to NAFTA can be made:

● In order to empower businessmen as well as lessen doubt, there has to be a reform in the presidential permit procedure. Manufacturing occupations would be protected and US made products would be made more competitive as a result of the reform.

● Efforts have to be made to encourage a regional approach to labour force development standards and certification in order to protect manufacturing and logistics occupations as well as to ensure the competitiveness of US made products, which can be done by improving efficiency of workers through the establishment of superior standards employed by the leadership of the private sector.

● Private capital has to be urged to provide capital to infrastructure over frontiers. These sorts of fundings allow businesses to be well-equipped in order to fortify the competitiveness of US supply chains as well as allow them to put more effort into prime concerns.