Senior bureaucrats from Canada, the U.S. and Mexico are gathering this week to discuss the future of the North American Free Trade Agreement (NAFTA), which has led cross-border commerce to increase to more than $1.1 trillion dollars while being deemed the “worst trade deal ever made” by U.S. President Trump.
Capitalizing on fears over factories moving from the U.S. to Mexico, Trump has repeatedly called NAFTA “a disaster.” He has vowed to scrap the 1994 agreement if Canada and Mexico don’t agree to major changes as part of his “buy American” agenda.
When the negotiations began this year, Canada and Mexico formed something of a united front, pressing to keep the deal without major changes. During the Fifth Round of talks in Mexico City which conclude on Nov. 21, however, some Canadian officials hinted at the possibility of Canada and the U.S. signing a bilateral deal, prompting former Mexican President Vicente Fox to warn Canada not to abandon Mexico like a modern-day “Judas.”
Here is a breakdown of the rhetoric and reality surrounding one of the world’s most valuable trading relationships and the Trump administration’s positions on it.
Claim: “We are in the NAFTA (worst trade deal ever made) renegotiation process with Mexico & Canada,” Trump tweeted on Aug. 27.
Analysis: While there are plenty of legitimate debates over the winners and losers of NAFTA, calling the agreement the “worst deal ever made” is simply not accurate.
The 1842 Treaty of Nanking, signed between China and Britain following the opium wars, for example, forced the Chinese pay the Brits millions of dollars in compensation for opium confiscated by Chinese officials. It also allowed British merchants who misbehaved on Chinese soil to be tried under British courts, gave English merchants preferential rights on tariffs and ceded control over Hong Kong to Britain, according to data from the University of California.
Trade deficits and shuttered auto factories don’t compare with ceding territory or forced compensation payments for opium traders when it comes to a bad deal.
Verdict: Patently false.
Claim: “We cannot ignore the huge trade deficits, the lost manufacturing jobs, the businesses that have closed or moved, because of incentives, intended or not, in the current agreement,” U.S. Trade Representative Robert Lighthizer said as NAFTA negotiations began. Lighthizer blamed NAFTA for a direct loss of 700,000 U.S. manufacturing jobs since the pact took effect in 1994.
Analysis: The U.S.-Mexico trade balance swung from a $1.7 billion U.S. surplus in 1993 to a $64 billion deficit in 2016, according to the New York-based Council on Foreign Relations, a nonpartisan research group.
The U.S. actually has a modest $12.5-billion dollar trade surplus with Canada, its second-largest trading partner, when it comes to goods and services, according to U.S. government statistics.
“The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP.”
The administration’s general claims on factory job losses due to NAFTA, however, are backed by other studies, including one from the Center for Economic and Policy Research, a left-leaning think-tank based in Washington D.C.
It’s difficult, however, to parse how many of these job losses were due to NAFTA and how many would have happened regardless due to automation, the rise of Chinese manufacturing, and other factors.
For context, the U.S. lost about five million manufacturing jobs between 2000 and 2014, according to the non-partisan Economic Policy Institute in Washington. Job losses directly linked to NAFTA likely would have hit home in the years following the agreement itself, rather than a decade later.
In an analysis of the broader impacts of the deal, the nonpartisan Congressional Research Service Concluded that “NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters. The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP.”
While the broader impact of NAFTA on the U.S. economy may have been small, this claim about 700,000 lost manufacturing jobs seems to stand.
Verdict: Basically true.
Claim: “We’re also going to stand up for our dairy farmers in Wisconsin… Because in Canada, some very unfair things have happened to our dairy farmers and others,” Trump said during a rally on April 18.
Analysis: The dairy dispute is one of the most complicated points of contention between the U.S., and Canada. Mexico largely backs the U.S. position when it comes to dairy.
Canada maintains a system of supply management for dairy and eggs. This means provincial regulating boards, rather than the free-market, determine the price at which eggs, milk and cheese can be sold in Canada and how much of the commodities should be produced by farmers. U.S. dairy producers aren’t happy about this: they have to pay tariffs of 270 percent to export into Canada.
Canada’s supply management system was well-understood when NAFTA was first signed, but a new type of milk protein, created after 1994, has stoked tensions.
Diafiltered or ultra-filtered milk proteins are not subject to NAFTA tariffs, and U.S. dairy producers had been been exporting them at a low cost into Canada.
In response to this wave of imports and complaints from local farmers, Canadian authorities created a new class of milk regulation, hampering U.S. exports and hurting some Wisconsin dairy producers.
U.S. and Mexican dairy farmers are now pushing for Canada to end its supply management system. Canadian negotiators say they won’t budge on this issue and that calls to eliminate the system are non-starter because U.S. dairy farmers receive massive subsidies.
Dairy farmers in Wisconsin have doubtlessly been hurt by Canada’s change of rules for ultra-filtered imports and some farmers in Wisconsin and other places have lost business because of the regulatory change in Canada.
Verdict: Largely true
Claim: “Ford is leaving. You see that, their small car division leaving. Thousands of jobs leaving Michigan, leaving Ohio,” Trump said in September. He blames NAFTA for automakers moving production to Mexico. The Trump administration wants the new deal to ensure that cars only enter the U.S. without tariffs if they’re comprised of at least 50 percent U.S.-made parts.
Analysis: Wages in Mexican auto plants start at around $2.45 (U.S.) an hour which is indeed a powerful incentive for manufacturers to move production south of the border. The U.S. auto sector lost some 350,000 jobs since 1994—a third of the industry—while Mexican auto sector employment spiked from 120,000 to 550,000 workers, according to data from the Council on Foreign Relations. Without tariff protections, investment capital flowed into Mexico to capitalize on wages roughly 90 percent lower than what unionized U.S. auto workers were earning in states like Michigan.
The solutions proposed by the Trump administration, however, are unlikely to bring auto jobs back state side.
In other words, it’s reasonable to say that NAFTA (along with other factors which are arguably more important) hurt employment in U.S. auto factories.
The solutions proposed by the Trump administration, however, are unlikely to bring auto jobs back state side. Most analysts (and the auto industry itself) say proposals demanding that half of a vehicle’s content is U.S. manufactured are not reasonable, given interlocked supply chains across North America.
Moreover, cars imported into the U.S. from outside of the NAFTA zone only face a 2.5-percent tariff. In other words, if NAFTA is scrapped or the new 50 percent American content proposals are accepted by Canada and Mexico, it would be cheaper for automakers to build their cars in China and pay the tariff to ship them into the U.S. rather than building more cars in Michigan.